Information Asymmetry: Why You Can't Predict the Market
Information asymmetry.
I am in a position as a brand manager in an FMCG company. Most of my work includes market data analysis, communication, brand strategy and decision making. Attending meetings after meetings, building up models after models, to pursue certainty about what will happen in the market.
I am not a fan of pursuing certainty in a volatile environment like the economic market and customer behaviour. In my previous blogs, I introduced chaos theory: our ability to predict the future is severely limited by the complexity of real-world systems, which often have a property called chaos, where small differences in starting conditions cascade into wildly different outcomes. To be concise, we don't possess all the information in the world.
"All you see is all there is."
"We don't know what we don't know."
These sentences should be framed and hung in each data scientist's or market analyst's office. The lines have pulled me back to reality from the delusion of certainty in my decision-making.
Impactful events are highly improbable, such as 9/11, the 2008 financial crisis and the COVID-19 pandemic, you name it. The highly improbable event is a combination of information asymmetry and chaos, which is beyond our ability to predict. However, those events we know are highly probable to happen do not hit humans in an unprecedented way.
For example, as a mortgager in 2007, you would realize that the interest rate was going higher and higher, which was beyond your ability to refinance. As a mortgage banker, you would believe the housing market will never crash as it goes up 10% yearly. As a hedge fund manager, you probably would find that those collateralized debt obligations (CDOs) are poorly structured and highly risky but have received AAA ratings from credit rating agencies. As a result, you can bet against the CDOs by buying a credit default swap (CDS). To do this, you have to be extraordinarily dodgy and creative. As an ordinary U.S. citizen, you would only find out your pension fund evaporated overnight in 2008.
Furthermore, business analysts or market "experts" make a prediction based on the assumption that humans make decisions rationally. Do you think you make all your decisions rationally? Research indicates that emotions can heavily influence humans' decision-making. For example, we tend to make completely different choices when we are angry compared to when we are tranquil. The same subject but with a different emotion can lead to a different decision, thus, a different outcome.
Chaos within a chaotic environment.
How to deal with it?
Open to futility. We have to acknowledge that sometimes there is no result after all the work you have done. It's natural, and it is the norm.
After all, we are tiny. Think about how big the universe is; our life span is not even a blink of it.
When you cannot control everything, then just do the right thing.