Saturday, January 16, 2016

Uncertain and Unknown

Barry Ritholtz discusses 'surprises' in a Bloomberg Article.

I am giving below my own thoughts, using his article as a basis for my ideas.

Markets are uncertain. This means that outcomes are not known in advance. Markets do not offer multiple choice questions. If the correct answer is always one out of four possibilities, there is no uncertainty, making trading and investing rather easy.

But Markets do not oblige us by offering such choices. Unknown and unusual events can affect the market, sentiment can turn due to actions that may not be related at all to market behavior. There is no equation which gives a specific outcome or a choice of specific outcomes if there is a certain event.

Ritholtz says: "“Uncertain” and “unknown” are two very different things. Roll a pair of dice, and the results are unknown in advance, but are hardly uncertain. The set of possible outcomes is well understood (1, 1; 1, 2; 1, 3; and so on). Uncertainty is when the possible outcomes are wholly unknown and unknowable. War is a classic example of uncertainty. "

The Human being survived million of years of natural evolution because they were just 'good enough' to survive. We cannot claim that the human species is perfect. How do we know this anyway? what is the measurement of perfection? All, we have to be is meet the requirements for being better than normal.

The same applies to investors and traders. Traders who aspire perfection will never get it. Traders who want positive outcomes from their trading will consistently make money.

We now come back to the 'uncertain'. Traders must acknowledge that many of the Market actions are uncertain. Their approach to markets should be accept the effects of uncertainty, continue their trading, wait patiently for unknown, uncertain times to pass by. Also, Do not try to predict what is not known!

1 comment:

rocky said...

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