Suspecting that markets are a combination of factors involving psychology,sociology,statistics,economic theories,quantum physics- & yes the pure fundamentals and technical followers; the underling nature in many ways reflects the true tangibility of reality. I have often tried to frugally translate some of these concepts into logic pertaining to markets such as in the Uncertainty post
With that said, in the last 5 months I have been blessed in many ways to dive deeper into these general concepts & while I have come across people who inadvertently believe that their unique strategy is the way to understanding markets- I fail to comprehend. But with that mentioned, I also believe there is an element of truth in what they have to say; it’s just not the complete story.
Ultimately, the goal is not ” merely to ponder” but translating this information into actionable decision making processes to participate in markets. This is where modern economic theories taught at university level has got me gob-struck…right from the efficient market hypotheses to those based on pure historical extrapolation. Many if not all of these economic schools of thought are completely contrary to those practiced by major market players.
The more I listen, read about and observe some of these major market participants- the more disconnect I am exposed to with respect to the retail investor. With the exception of one or maybe two individuals known to me, I yet haven’t come across a money manager/individual whose mental frequency is aligned towards that of a major player. What I do come across is many “Fake it till you make it types” (not that there is anything wrong with this; within limits) with a completely out of balance ego quotient.
Never-the-less, one of the more rarely heard about economic theory which has sparked my interest is that of Fallibility, Reflexivity and the Human Uncertainty Principle (ironically, has a link to the Heisenberg’s uncertainty principle as posted in one of my previous posts)
Fallibility refers to the tenancy of humans to generalize and in many ways structure thing around us to create a set of rules and assumptions based on which there is an expected outcome.The mere act of us trying to understand markets could be considered as a case of acute Fallibility.
Reflexivity on the other hand requires a continuously thinking loop of sequences in the present.This is further complex-ed by thinking mechanisms that are purely objective (Efficient market hypothesis as example) and those that are designed to be manipulative (Quantitative easing as example); influencing the objective outcome. Reflexivity is subjected to Fallibility and vice-verse.
The Human Uncertainty Principle is a mush of both Fallibility and Reflexivity as we experience it in the now.
Financial markets are a epitome of the Human Uncertainty Principle which unfortunately in futuristic states does not validate the laws of statistics and probability with complete accuracy as expected theoretically (quantum physics like??) This leaves the investor/market participant in a constant state of uncertainty depending upon the outcome of this tug-of-war between Reflexivity and Fallibility.
In other words, the investor has not only to deal with quantifiable risks (the statistics and probabilities associated) but more importantly human uncertainty- which precedes data that is later quantified to draw logical (so called) conclusions.
I hope, I am doing justice in translating my understanding of this principle which forms the basic tenant of a certain gentleman who is known for his famous single day profit of US $1 Billion on September 16th 1992 (you know who I’m talking about).
Economics seeks to be a science. Science is supposed to be objective and it is difficult to be scientific when the subject matter, the participant in the economic process, lacks objectivity—G.Soros