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Kaizen: Continuous Improvement
In Japanese, kaizen means continuous improvement. As a business strategy, kaizen aims to
eliminate waste in business processes. For our purposes, kaizen is the process of continually
searching for and implementing new quantitative methods, new data cleaning techniques,
new optimization routines, new technologies, and new risk management methods that will
lengthen the maturity stage of a trading/investment system. (Kaizen can also mean continu-
ous improvement of new trading system design and development processes, but we will stick
to the former definition for this chapter.) Kaizen, then, really started in Stage 4, where SPC of
performance and risk metrics discovered nonconformances and analysis found root causes.
As with all quality processes, top management must lead the way to create a culture of
continuous improvement. Kaizen succeeds through systemic thinking versus the current pro-
gramming “ scrum-only ” view of producing small, incremental software changes. It is not the
programming technique that is wrong, but the lack of a process improvement methodology.CHAPTER ◆ 30
Variation is like the water level in a stream. A high water level hides big rocks under the surface. Lowering
the water level will expose the big rocks. At that point, the big rocks can be cleared before they wreck the
boat. Removing big rocks lowers the water level, revealing more rocks, which can also be cleared; and
you keep on going until there are just pebbles left.
The rocks are the undetected root causes of variation in a trading/investment system; they cause per-
formance to drift out of control or crash during periods of market stress. The hidden rocks are creating
variation and hindering performance; removing root causes lowers variation, which will in turn reveal
other root causes, and you keep going until there are no root causes left. Toyota invented this methodol-
ogy and it is used at every major Lean/Six Sigma organization. It inevitably leads to innovation (i.e., dis-
continuous improvement) through jumps.A culture of continual improvement will eventually also yield large innovations in the
form of compounded improvement. Kaizen includes making changes to trading/investment
systems, retesting, implementing, and again monitoring results.30.1. Continuous Improvement Processes
Continuous improvement is an ongoing effort to improve benchmarked methods and
technologies that are no longer able to implement their competitive advantage. Several