Sunday, October 4, 2009

Illusory Rationality: No one can "understand" the market

DailyKos has a contribution to the mythology of rationalism today.

It is a misconception to think that someone who makes money in the stock market "understands" something that is missed by someone who loses money.

The simple fact is that we all have incomplete and unreliable information -- even the market players do (though they have the advantage of being able to move the markets with massive amounts of capital, and hence are in a position to "cheat" in the short term -- something they often do at the expense of their own clients).

If you made money sometime as an active investor, then more power to you.

But you were simply lucky. Lucky to have avoided a 1987.

Those who bet short on the 2007 market had a little more vision, but they were also lucky not to have been squeezed out of their shorts by a further year of index inflation, which might easily have happened.

There is little to "understand" about the market; Plato makes the distinction between knowledge and true belief; the latter is the best we can hope for.

There are too many factors influencing the dynamics of a market for it to be understood or predicted by any model. The so-called "professional" portfolio managers do no better than the average Joe in Peoria.

Where does this leave us, then? In terms of the investment component of the capitalist system, it must put us in a position of skepticism regarding one's self-determination, and raise doubts about the value of the application of the mind to this area of economic activity.