Sunday, 2 November 2014

Write once, read many

00:25 Posted by The Thalesians (@thalesians) 1 comment

Youth vanishes from the stage first, supposedly to reappear in a later act, as wisdom. As each generation drifts into the past, its wisdom and experience seeps into the fabric of collective memory, weaving what will be called history. Just as the present is debated vigorously among its many actors, so is the past. The interpretation of the past changes over its immediate aftermath and over the ages. History is not so much a chronological list of events. It is more the understanding of how these events relate and why they occurred, which forms the basis of history. Indeed, Herodotus, the father of history, emphasises these points in the introduction of his epic work, the Histories:

This is the Showing forth of the Inquiry of Herodotus of Halicarnassus, to the end that neither the deeds of men may be forgotten by lapse of time, nor the works great and marvelous, which have been produced some by Hellenes and some by Barbarians, may lose their renown; and especially that the causes may be remembered for which these waged war with one another. (Herodotus & Macaulay/trans, The History of Herodotus, 1890)

No matter how hard we might try, events still obey the rule of write once, read many. We cannot undo an event, once it has been "written", despite our continual reinterpretation and "reading" of it. We can of course conjecture about whether a different path, would have altered history.

Finance is of course no different, when it comes to mapping the present with the past. There is a constant need for reflection of the past, perhaps even more so in finance, where traders profit from seeking the future. For specific cases, we have masses of data, which can aid us in the process of interpreting the past. For example when it comes to systematic trading strategies, backtesting can enable us to understand how a model would have performed in the past. Of course, it can be fraught with difficulty, notably the scourge of data-mining, which involves traders "fitting" a model excessively on historical data. The result is often an over-fitted model, which fails to capture the dynamics in the future.

There are more complex scenarios, where alternative paths for the path are somewhat more difficult to model. We recently saw the end of quantitative easing by the Fed, which fits under this category. The policy has had both its detractors and supporters. For supporters, we know how QE has played out in the short term. Would policymakers have liked more growth? Of course, we all would have liked that. However, for detractors, we shall never know quite the world would have turned out without the Fed's policy of QE. Yes, Fed QE has not been perfect. Markets may have been indulged for too long on this fix of morphine. Indeed, will the main memory of QE be S&P500 at 2,000?

Yet, reaching back to the days of the Lehman crisis, those were not normal days, neither for policymakers nor for markets. Policymakers responded with the experiment of quantitative easing, which seemed to stabilize the complete and utter confusion over the most severe part of the crisis. Perhaps, we have been made complacent these days, by comparatively stable markets. Indeed, in recent weeks, when VIX, Wall Street's fear gauge, jumped a few points, or S&P500 dropped a hundred points, it was as though pandemonium had spread through markets. By Lehman standards, it literally nothing and by the end of October this year, it seemed as though markets had recovered.

The past is not an exercise in perfection, after all it is humans who write it. Writing a different past, does not always mean a better present. If only we could write many....?

My book Trading Thalesians - What the ancient world can teach us about trading today is out in late October on Palgrave Macmillan, has some colour on the topic of learning from the past (mixed in with a bit of ancient history). You can order the book on Amazon.

1 comment:

  1. Well said. The interpretation of the events leading to the outbreak of WW1 and the resulting conflict itself have spawned thousands of books, documentaries and films, each with their own take. QE is viewed in a benign light by policy makers at this juncture, but how will things look in ten years time.. ?