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Complex Systems and Predictability

  • "The SP500 dropped 30 points because of X or Y". Sometimes, things are indeed that clear - COVID, 2008 Housing market collapse, etc. However, more frequently than not, it isn't. We then attempt to apply a simple and neat assumption to explain what's happening.

  • The problem is, complex systems don't care about our convenience in comprehending what's happening.

  • The stock market is an incredibly complex system - much more than what most people comprehend.

  • This leads to the main section of this week's UTM (Under the Microscope) - do NOT fall for simple narratives explaining complex systems. They're generally wrong.

  • There's nothing wrong with following the markets and identifying connected systems and creating observations over time. The issue comes when we start to believe our own predictive capabilities and rely heavily on them in our edge creation process.

  • Create observations. Severely doubt most of them.

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