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Alex Barrow spent over a decade working as a US Marine Scout Sniper and as an Intelligence Professional for the government where he specialized in covering the economic and political spheres of the Asian-Pacific region.

Barrow left the public sector to work as a consultant for a ... more

The Fallacy Of Market Prediction

Date: Thursday, January 19, 2017 4:40 AM EST

Sounds tough, right?

It is. Like I said at the beginning, our minds are not wired for markets. It takes conscious effort to think this way and we’ll always be limited by the biases we carry; many of which we’re unaware.

And it actually gets even tougher. Not only are there unknown unknowns in markets, but markets are also reflexive.

This means that my thinking about the possibilities and your thinking about the probabilities and Joe Schmoe’s thinking about simple predictions ALL affect the market. This in turn affects our thinking about the possibilities, probabilities, and… you get the picture.

I’m not trying to throw you down the rabbit hole. This is just how markets function.

Reflexivity was put forth by George Soros (though the philosophical origins of it actually stem from Karl Popper).

Here’s the actual way you should think about markets:

 

The Actual Way You Should Think About Markets

 

It’s a headache right?

And that’s the point. Thinking about markets is hard if you’re doing it right.

You should always maintain a certain amount of insecurity — the good kind of insecurity that makes you constantly question your assumptions, beliefs, and mental models.

Ed Seykota used to say, “There are old traders and there are bold traders, but there are very few old, bold traders.”

If you want to survive in this game, you need to recognize that you operate with a constant information deficit.

You can never know how large this deficit is. Therefore “prediction” is impossible. And assigning actual “probabilities” is useless.

Everything is only “possible” and everything is always unknowable.

This is why thinking in possibilities and increasing your cognitive flexibility is paramount to your long-term trading survival.

Malcolm Gladwell once retold the following story about George Soros (possibly the most cognitively flexible trader to have played the game).

An old trading partner of Taleb’s, a man named Jean-Manuel Rozan, once spent an entire afternoon arguing about the stock market with Soros. Soros was vehemently bearish, and he had an elaborate theory to explain why, which turned out to be entirely wrong. The stock market boomed. Two years later, Rozan ran into Soros at a tennis tournament. “Do you remember our conversation?” Rozan asked. “I recall it very well,” Soros replied. “I changed my mind, and made an absolute fortune.” He changed his mind!

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