Keynes said it before us

Someone named Robert Skidlesky wrote a book called John Maynard Keynes: 1883-1946: Economist, Philosopher, Statesman. He says that Keynes said “not all future events could be reduced to measurable risk. There was a residue of genuine uncertainty and this made disaster an ever-present possibility, not a once-in-a-lifetime ‘shock’. Investment was more an act of faith than a scientific calculation of probabilities.” (The New York Times Sunday Magazine 12.14.08)

We couldn’t agree more – regardless of timeframe. And neuroeconomist research (Check out Hsu or our French PhD chick’s posts) is even providing pictures of our brains acting on this faith versus “scientific calculation of probabilities”.

Not that us traders shouldn’t attempt to create market strategies and tactics that divine the probabilities but when we do so, we will be better served to remember that in effect we are using a crude tool – no matter how precise it may appear. Any effort to predict where the market will be is indeed a prediction on the future – be it in 10 minutes or 10 years.

Furthermore, our brains seem to be wired to rely on feelings when they detect inherent uncertainty – or imprecise probabilities. So… all the more reason we need to understand that we are working with only an approximation no matter how complex our algorithm, chart or trading tactics are.

In short, anything can (and clearly does) happen at any time. We need our BRAINS – which happen to be really good at unconscious pattern recognition and dealing with imprecision to kick in – not just the sophisticated overlay we have concocted.

After all we are betting on other brains to pay more – or sell for less. It can never hurt to know what game we are really playing.

Can it?

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This Post Has 4 Comments

  1. < “not all future events could be reduced to measurable risk. There was a residue of genuine uncertainty and this made disaster an ever-present possibility, not a once-in-a-lifetime ’shock’. Investment was more an act of faith than a scientific calculation of probabilities.”

    Just so, but then, ironically, Keynes, & kindred madcaps, devote themselves, tirelessly, to invigorating the black swan population….

    what do you think of this? “We’ve been developing and strengthening this hypothesis for years—how the brain represents probability distributions,” says Pouget. “We knew the results of this kind of test fit perfectly with our ideas, but we had to devise a way to see the neurons in action. We wanted to see if, in fact, humans are really good decision makers after all, just not quite so good at doing it consciously. Kahneman explicitly told his subjects what the chances were, but we let people’s unconscious mind work it out. It’s weird, but people rarely make optimal decisions when they are told the percentages up front.”

    http://www.physorg.com/news149345120.html

  2. < “not all future events could be reduced to measurable risk. There was a residue of genuine uncertainty and this made disaster an ever-present possibility, not a once-in-a-lifetime ’shock’. Investment was more an act of faith than a scientific calculation of probabilities.”

    Just so, but then, ironically, Keynes, & kindred madcaps, devote themselves, tirelessly, to invigorating the black swan population….

    what do you think of this? “We’ve been developing and strengthening this hypothesis for years—how the brain represents probability distributions,” says Pouget. “We knew the results of this kind of test fit perfectly with our ideas, but we had to devise a way to see the neurons in action. We wanted to see if, in fact, humans are really good decision makers after all, just not quite so good at doing it consciously. Kahneman explicitly told his subjects what the chances were, but we let people’s unconscious mind work it out. It’s weird, but people rarely make optimal decisions when they are told the percentages up front.”

    http://www.physorg.com/news149345120.html

  3. What I think is that the information conveyed in Pouget’s work is conveyed through a feeling – and therefore, developing consciousness about feelings is the quickest way to make better decisions.

    I wouldn’t necessarily agree with him that all of Kahneman’s work told the participants the probabilities but the underlying problem with making the best decisions remains – it is a matter of knowing how to use your feelings as data – not something most Financial Engineers are taught to do.

    Ming Hsu, now of University of Illinois, has done the seminal work on risk versus ambiguity and our own French PhD check summarizes it very well – in fact Dr. Hsu told me it was the best summary he had seen!

  4. What I think is that the information conveyed in Pouget’s work is conveyed through a feeling – and therefore, developing consciousness about feelings is the quickest way to make better decisions.

    I wouldn’t necessarily agree with him that all of Kahneman’s work told the participants the probabilities but the underlying problem with making the best decisions remains – it is a matter of knowing how to use your feelings as data – not something most Financial Engineers are taught to do.

    Ming Hsu, now of University of Illinois, has done the seminal work on risk versus ambiguity and our own French PhD check summarizes it very well – in fact Dr. Hsu told me it was the best summary he had seen!

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