Fooled By Randomness.

Recently I tried the Thomson Reuters Eikon platform. It has all the data one can think of—GDP analysis, Sectorial money flow, earnings, Cash flow, Deals, Shareholders info, and News.

We are living in a time where people are using data to justify their knowledge. Looking at so much data that changes all the time to buy a company's stock when we all care about its stock price appreciation or depreciation can lead us to get fooled by randomness.

Looking in terms of the Three bodies problem: If the universe had only two planets, everything would have been easy, especially weather and earthquake prediction, etc., since there are only two variables to be calculated. But the moment we introduce the third planet, the universe gets a lot complex with uncertainty all around. The butterfly effect comes into play!

Similarly, the stock market pricing mechanism gets very complicated if you use many variables to determine whether the price will rise or fall.

Further, Correlating with Heisenberg's uncertainty principle: At a time to achieve alpha return (particle), you can either measure price (momentum) or underlying fundamental (position). Not both at the same time. As always, The news will come later and satisfy the fundamentals.

It's not that details arent necessary, only that what a crowd believes is important can distract us from a more central attribute of the pricing mechanism.

“More data—such as paying attention to the eye colors of the people around when crossing the street—can make you miss the big truck.” - Nassim Nicholas Taleb

<Choose Your Heisenberg>



*15 July 2020