Tuesday, 22 March 2016

It's not bigger and it's not cleverer (to call doom rather than boom).

Is it clever to be bearish? There does seem to be an assumed intellectual bias towards calling disaster rather than 'Ok'ness. One only has to read the Prof of Black Swans, the Nobel Memorial Prize in Economic Sciences Prof New York Journo fellow, or the British Scottish Laurence A. Tisch Professor of History at Harvard University Senior Research Fellow of Jesus College University of Oxford Senior Fellow of the Hoover Institution Stanford University and visiting professor at the New College of the Humanities History Prof writing economics man.... or infact any of the Prof Prof Prof of Profdom to notice a sell pitch of intellect towards calling doom.

Or is it just the way it's reported? One rarely reads a headline along the line of '"Everything to be just fine and stocks will probably grind 2% higher this year" says Dr Professor Nobel Laureate who also called the pretty dull year of 2004 absolutely correctly'

It is fascinating psychological field which I think rests upon a feeling that OKness implies no need to do anything, so no need to think, so an implication that those being carried in the tide are unthinking and lazy. Whereas those who question the tide and worry about waterfalls ahead are therefore perceived as thinking and sensible.

But this assumes that the tide of laziness is to be long equities or yield versus cash as there is more risk in equities so therefore those who express a full understanding of the risks to being long will be best evolved to survive. Which is right. But where a market is just as driven by people taking active shorts the reverse is just as applicable but often not noticed. The value of wisdom of knowledge of why not to be short is just as valid as why not to be long. This should apply to 'long only' managers who have to explain away any underperformance to their stock index benchmark and for whom being short in a rising market can be as career threatening as being long in a falling market. For these investors, cash is the riskier asset and so the intellectual bias should be to evaluate every nuance for why the value of cash versus an equity would fall.

If we were to use this year's US stock market performance as a measure of the wisdom, intellect or sageness of either camp, we can see it's a draw. There may be very clever intellectual reasons as to why the market has/should/will fall but that cleverness needs to have a deeper level of cleverness applied to it to explain why the first level of cleverness has been wrong. The easiest, dismissive self placating, ego rectifying, world modelling way is to state that everyone else is stupid and you are clever. You see this everywhere. But really, assumed intellectual bias is self disproving. You may think you are clever but if you are wrong by the measures you yourself have set then you are not. Unless of course cleverness is not measured by outcome but by process. In which case we need to reweight the importance of cleverness in making money in markets (now that is a huge topic in it's own right).

But here's a thought. If the market price is the weighted sum of all expectation, and the cleverest are in a minority by definition, then the minority of cleverest are not those that can deduce the most complex of reasons for future moves but simply those who understand the less clever the best.

You be as intellectually clever as you like but the way to making money in markets is understanding what other people will do before they themselves do. And that has no directional bias.

Addendum -

In today's world there are so many 'academic' papers in existence there's one for every cause. I have thought of developing an app called ' "acrapadimiciser" a tongue twisting name for an app that automatically finds and attaches supportive papers to any argument, no matter how crap.

But here I introduce the paper that will support not just my argument of the futility of supporting your argument with papers, but also the point first mentioned in this post of academia really not being able to call social and behavioural outcomes as science really is different from the social arts (yes social arts they are not sciences). I give you the infamous Transgressing the Boundaries: Towards a Transformative Hermeneutics of Quantum Gravity by Alan D. Sokal http://www.physics.nyu.edu/faculty/sokal/transgress_v2/transgress_v2_singlefile.html

If you don't know why it's infamous read THIS

And finally a paper on why papers are more likely to be believed if written by a 'name' https://www0.gsb.columbia.edu/mygsb/faculty/research/pubfiles/4570/false%20enforcement.pdf which used the Sokal paper as its subject matter.

Papers on papers showing papers may not be worth the paper they are written upon.


Anonymous said...

Great post. It's really a game of out guessing each other and the ones who out guess the "out guessers". Gets pretty recursive! Where do you stop?

This same thing rephrased in a slightly different context: https://en.m.wikipedia.org/wiki/Guess_2/3_of_the_average

Boris Kurgan said...

Absolutely brilliant! You just put my inner confusion on paper and made it clear. Thank you.

Anonymous said...

Superb post. You've spotted a psychological bias (actually a deficiency) in those who cover over their failures in the belief that they are somehow more "intellectual". Central Bankers are the worst culprits, many traders also fall into this trap.