Asset management, Behavioral finance, Commodity price, Complexity, Economics, Expertise, Hedging, Market psychology, Psychology, Stock market, trading, trend following

The illusion of expertise in financial markets

Participants in financial markets have to deal with uncertainty on a daily basis. Their need to research and understand markets has given rise to a massive industry delivering security prices, reports and expert analyses to traders and investors seeking to make sense of the markets and predict how they might unfold in the future.

The need to understand stuff is innate to our psychology: when something happens, we almost reflexively want to know why it happened. But the compulsion to pair an effect with its cause sometimes gets us jumping to conclusions. If such conclusions turn out to be mistaken or irrelevant, they could prove useless – or something worse. Consider two recent titles from the ZeroHedge blog, published 89 minutes apart: Continue reading

Asset management, Commodity risk, Complexity, Economics, Expertise, Hedging, Market research, Policy, Risk management

Economic forecasting is exercise in futility

Economists can’t forecast for a toffee… They have missed every recession in the last four decades. And it isn’t just growth that economists can’t forecast; it’s also inflation, bond yields, unemployment, stock market price targets and pretty much everything else.” – James Montier

Forecasting commodity prices and economic indicators is demonstrably an exercise in futility. Our markets and economies are complex systems and as such, their future unfolding is impossible to predict with any degree of certainty. Concretely, let’s take a look at how the leading economic analysts did at predicting oil prices, GDP growth, unemployment and stock market indices. Continue reading

Expertise, Psychology, Something completely different

In the beginner’s mind, there are many possibilities…

State a moral case to a ploughman and a professor. The former will decide it as well, and often better than the latter, because he has not been led astray by artificial rules.” Thomas Jefferson wrote this in 1787, but his words remain relevant. Advanced education often narrows our perspective, obstructing our ability to fully evaluate new information or to adapt well to life’s changing circumstances. What we think we know may keep us from grasping new things we need to understand. Zen masters of old likened our capacity to understand to a water bowl: its purpose may be to hold water, but it is only useful to the extent that it is empty. Here’s a real-life example of this metaphor…

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