The misadventures of ‘cause’

One of the laziest conventions in journalism is the daily stock market report. Something went up or down. And, even though it only just happened, the reporter confidently tells us exactly why.

I’ve always found this painful. Teasing out causation from the mass of noise is improbable. Especially with such certainty. Even given sufficient training, tools and time.

But as this passage in The Man Who Solved the Market highlights, it also likely breeds complacence among the retail investors in the audience.

During his time helping to run the Medallion fund, Elwyn Berlekamp came to view the narratives that most investors latch on to to explain price moves as quaint, even dangerous, because they breed misplaced confidence that an investment can be adequately understood and its futures divined. If it was up to Berlekamp, stocks would have numbers attached to them, not names.

Being so certain and deterministic tricks us into believing the market is knowable. After all, these journalists have brought the word from on high. They have revealed the market’s Rube Goldberg nature. Can I not learn these secrets too?

But, similar to how we miss the tiny influences when we reason from personal experience, these sweeping narratives of the market are dominated by a few big themes. They turn chaos into a simple story with characters and events, good and bad. They dismiss all the randomness, which is precisely where consistently successful traders like Renaissance stake their claim.

Another lesson of the Renaissance experience is that there are more factors and variables influencing financial markets and individual investments than most realize or can deduce. Investors tend to focus on the most basic forces, but there are dozens of factors, perhaps whole dimensions of them, that are missed. Renaissance is aware of more of the forces that matter, along with the overlooked mathematical relationships that affect stock prices and other investments, than most anyone else.

That “more” in the last sentence is probably the key. It’s not that they understand the market. But they’re looking at more of it. Well past the simplistic correlations that can be delivered in thirty seconds.

As always my emphasis