Financial Unpredictability and Reflexivity
For many people, $100,000 may be the psychological target. When an indicator becomes a target, it ceases to be a useful indicator.
George Soros describes financial markets as often unpredictable: we therefore need to prepare for different scenarios. Believing that we can accurately predict what comes next runs counter to the way he observes markets.
In Frost and Prechter's Wall Street classic, Elliott Wave Principle:
Sometimes the market appears to reflect external conditions and events; at other times it is entirely disconnected from the conditions most people assume to be causes.
Some passages in Robert Prechter's The Socionomic Theory of Finance illustrate the point well:
In this view, an observer's job is simply to identify which external events caused prices to change. When the news appears to fit market movements reasonably well, observers assume a causal relationship. When it does not fit, they try to construct a causal explanation that makes it fit. When they cannot even devise a plausible way to twist the news into an explanation of market behavior, they attribute the move to “psychology.” This means that, despite abundant news and many creative interpretations, their imagination has not produced a convincing causal story.
Most of the time, observers readily believe in news-based causation. Financial markets fluctuate constantly, and news arrives constantly. Sometimes the two align well enough to reinforce commentators' bias toward mechanical causation. When the news and the market disagree, they shrug and ignore the mismatch. Those working within a financial-mechanics paradigm seem never to notice—or care about—these obvious anomalies.
Behavioral economics has the concept of cognitive bias: once a view becomes the majority consensus, even at 51%, the cost of challenging it grows rapidly. A stampede is merely one of the easiest outcomes to trigger.
