Glass Oracles: The Art and Danger of Prediction (Part 1)
It’s been a while since my last post, mainly due to real life factors like well, the end of the quarter of my Ph.D. program fast approaching. I’ve been extremely lucky to be on some fantastic podcasts to muse about life, the universe and everything, and ended up in some bizarre Twitter drama — which is doubly hilarious given it’s been mostly mid-career finance professionals and sir, this is a Denny’s.
In this weird niche of the internet we find ourselves, financial Twitter, you see an interesting confluence of people throughout the financial spectrum: ambitious youngsters (myself included) exchanging clout as currency, talented researchers, complete charlatans, legendary investors, powerful hedge fund managers, regular day-traders and low information investors. What’s fascinating about the internet is it ends up fairly meritocratic, up and to a point — regardless of origin, if you produce quality content, your audience will follow. This algorithm of course can be gamed, and it isn’t to say that everyone with a large following is necessarily knowledgeable. Despite recent events, I’m still 25, and I still have yet to work in industry. Books only get you so far.
The most interesting phenomenon out of this is the currency of clout in the trading and financial world — the art of prediction. Prediction of the market is one part magic trick, one part weather forecaster. It tends, out of any other content, to be the most impactful and the quickest way to build up an audience, and tends to create a positive feedback loop (successful predictions tend to signal boost the predictor exponentially). I’m not calling prediction the realm of charlatanism — it’s undeniable that successful investors predict, albeit it on varying timeframes, the market. We instinctively make predictions every day, but most of us don’t call it that.
For this series I’m going to focus on the non-intuitive edge cases of probability, and the implications they have for our understanding of the markets and in trading.
The Sun Also Rises
Since ancient times, people have worried that the Sun may not rise tomorrow. This was especially salient before the advent of astronomy or the scientific method, and of course was the center of much of human mysticism since time immemorial. However, given that humans have never lived a day without seeing the return of our stellar companion, how could one answer the following question: