The stock-in-trade of investment strategists and analysts is to compare today’s market to comparable historical markets. On the face it this seems like a reasonable activity. As the old saying goes, “markets don’t repeat, but they do rhyme.” However there is a big, oftentimes unacknowledged, problem with this approach. The analyst who is looking for analogous market situations has a bias. That bias might be bullish or bearish, but they are likely to look for (and find) those observations that best fit their current viewpoint. The only defense against this is to take a more systematic approach to market analysis and not let one’s biases affect one’s analysis. This is easier said than done, but it is the only way to avoid the pitfalls of confirmation bias. In today’s screencast we look at the hidden challenges in finding appropriate market analogies.
Items mentioned in the above screencast:
It took some doing but a bearish strategist has been found. (Pragmatic Capitalism)
On the dangers of starting with bad times and working backwards. (A Dash of Insight)
Confirmation bias. (Wikipedia)