People like the idea of cause and effect. If a bad thing happens, discovering the cause provides control. You can avoid it in future. For good things, once you know the cause, you can do more of it.
The assumption is that if you try hard enough, you can find the cause. For some things it is possible. If I push the button on a doorbell, it nearly invariably produces a sound inside the house. If I turn the key in the ignition, the car starts. One step cause and effect is easy and some, maybe many, people think everything can be reduced to this state. Possibly it can, but the methods are unclear.
First of all, there are few effects that have a single cause. The Chinese currency devaluation, and the actions by others in their neighborhood, has many elements in its causation chain. Some were actual decisions, others were careless mistakes, still more are unknown or even random.
Second, the weighting and order of the many causes is subjective. What might be seen as a personal slight by one finance minister could be ignored by another and treated as a positive by a third.
Third, modelling does not help a lot. Models are made by constraining the variables so that some estimate of what is happening can be seen. Simplifying eliminates variables that could matter. The result is an estimate, a good guess. Not necessarily right. Recall inductive reasoning.
Fourth, complexity is poorly understood. People approximate things driven by probability and combinatorics and get misleading answers. I recently attended a reunion of my neighborhood from 50 years ago. If there were 50 people there, how many ways are there to form a group of 3 people? 19,600! I think it certain that only a few of the possibilities actually occurred and not because someone dislikes me.
It is not that the chain of causation is missing. It is that we lack the tools to discover it.
It is likely that we will never fully develop that ability. People are impatient, ideologically biased and incapable of gathering all the information. People will tend to get the answer they expect.
Cause and effect in the stock market is elusive. I read a book by Benoit Mandelbrot and Richard Hudson. “The (Mis)Behaviour of Markets.” Mandelbrot was the founder of fractal geometry and a leading thinker about chaos. The book is surprisingly entertaining and it will tend to disabuse you of the simple cause and effect ideas that you have carried around since childhood.
See effect, then know cause is impossible in any complicated system that involves people and their competing interests. You cannot know what makes things happen.
Most of us use abductive reasoning. Inference but with too little information. We should be willing to treat our first assessment of cause as a candidate not as a fact. Create optional causes.
Market prices are not predictable. Even if you know an important fact you cannot know prices until you know how and when others will relate to it.
Carefully selecting stocks based on business factors has hope over the longer term.
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Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.