Sunday, 10 May 2015

Expecting a holiday from general elections?

09:21 Posted by The Thalesians (@thalesians) No comments

The notion of forming expectations seems ingrained into our psyche. It is crucial, because without having expectations decisions become purely random exercises. Expectations give us a guideline, however imperfect, to judge both the state of the present and future.

Take for example, when you go on holiday. One way to pick a holiday destination is to spin a globe, close your eyes and place you finger somewhere on the map's surface. Alternatively, we can draw up a short list of destinations. From those, we pick a place to visit, for which we have the most positive expectations.

Our expectations can be a product of many things. In this holiday case, something we might have read could impact our expectations. Friends might have traveled a certain place. We could have visited a destination a long time ago and have vague memories of it. The expectations we form might well end up being markedly different from other people too (the "consensus").

The problem with expectations around holidays, is that we nearly always go on them with very high expectations. After all, if you expected a holiday destination to be utterly awful, it would be unlikely you'd visit there in the first place!

Are all holidays fun? Not if they fall short of your very high expectations. If you're a keen swimmer, expecting spotless sandy beaches with tropical temperatures, and instead face water which feels like ice, your expectations are dashed! If on the other hand, you hate swimming and instead yearn to visit museums, the state of the beaches would be of little concern.

In the short term, markets are like holidays (however implausible this might seem) and we had a prime example this week! After the exit polls came out at 10pm LDN for the UK General Election showing a potential Tory win, GBP/USD immediately jumped. Polls had been pretty wishy-washy going into the election, some showing a Labour victory and other others indicating a Tory win, with relatively small margins of victory compared to the exit poll. Had anything actually changed materially, about the economy in that moment at 10pm? No, of course not. GDP did not suddenly change because of an exit poll! It was merely that real events surprised compared to real events.

In the longer term fundamental factors are a driver for markets. However, we shouldn't lose sight of how in the shorter term, the difference between expectations and news, can be a much more potent driver. Be careful what you expect, before you make a decision, because that will impact how you feel about the result, just like markets!

Like my writing? Have a look at my book Trading Thalesians - What the ancient world can teach us about trading today is on Palgrave Macmillan. You can order the book on Amazon. Drop me a message if you're interesting in me writing something for you or creating a systematic trading strategy for you! Please also come to our regular finance talks in London, New York and Budapest - join our group for more details here (Thalesians calendar below)

27 May - London - Gaining the alpha advantage in vol trading - Artur Sepp
29 May - Prague - Trading Thalesians book talk / Interactive FX intraday demo - Saeed Amen / The Thalesians (tickets here)
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