Notes from the Road: Bayes and the Boreen
August 21, 2018·0 comments
Investors have spent decades watching patterns hold. Long-term stocks rise. Bonds move opposite equities. Certain correlations persist. Yet these consistencies may not be laws of nature, but artifacts of a specific set of world conditions that nobody actively questions. What happens when those conditions change and investors discover they've been building portfolios on unstated assumptions rather than timeless truths?
• Historical consistency can mask hidden assumptions. A pattern that repeats for decades feels permanent, but it's often held together by beliefs about how the world works that are never examined.
• Experience becomes a trap when the world changes. Investors shaped by a major market crash often spend careers fighting the last war, treating singular events as permanent features of markets.
• When priors break down, updating becomes impossible. New information so far outside expectations creates paralysis instead of learning. The stakes feel too high to test assumptions experimentally.
• Comfort with a model prevents questioning what's beneath it. We rely on correlations that "work," but we rarely ask which unstated facts about the economy or policy or human behavior those correlations actually depend on.
• Owning less of things with unstable foundations might matter more than owning less volatility. If the assumptions supporting a prediction model are fragile, the real risk isn't daily price swings but the day the model breaks entirely.
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This commentary is being provided to you as general information only and should not be taken as investment advice. The opinions expressed in these materials represent the personal views of the author(s). It is not investment research or a research recommendation, as it does not constitute substantive research or analysis. Any action that you take as a result of information contained in this document is ultimately your responsibility. Epsilon Theory will not accept liability for any loss or damage, including without limitation to any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Consult your investment advisor before making any investment decisions. It must be noted, that no one can accurately predict the future of the market with certainty or guarantee future investment performance. Past performance is not a guarantee of future results.
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