Some stock market enthusiasts claim that they can predict financial market trends with fantastic accuracy.
Despite the complexities of international finance, they assure us that significant profits are within our reach if we follow their recommendations and emulate their behavior.
But is it really possible to accurately predict the behavior of financial markets?
As an expert in the psychology of decision-making who specializes in complexity research, I have had the opportunity to deepen my understanding of human cognition and its ability to control complex environments in the real world. For now, my conclusions are sobering and not easy.
Complex decisions
According to many decision researchers, understanding and managing complexity is the greatest challenge of the digital age. Complexity refers to the uncertainty of the environments in which we make decisions every day.
While some of our financial decisions may seem simple and obvious (save a portion of our income, set a budget, pay off a debt), the environment in which these decisions are made is unpredictable.
The strategies we use are certainly not infallible; Our knowledge is no guarantee of our success and the impact of each of our decisions is uncertain and unique. This explains why the environments in which we make everyday decisions are actually very complex. This includes many interrelated factors that are constantly changing, with or without our intervention. Not to mention that the goals we pursue are often self-contradictory.
For example, how can we maximize investment returns while minimizing the risk of market fluctuations?
Given financial complexity
Given financial complexity, human cognition tends to favor a reductionist approach to information processing, sometimes referred to as “tunneling.” Given the information overload that comes from complexity, we tend to focus on one or a few specific aspects of a situation rather than all available information because too much information destroys information. In other words, we take shortcuts. And guess what? These simplistic ways of thinking can lead to biased decisions.
We often make the mistake of blaming the poor performance of our stock portfolio on a single event that stands out in our memory. We mistakenly believe that our investments will grow linearly, when in reality they are susceptible to exponential fluctuations caused by crises and unexpected events. We respond poorly to unsuccessful investments by focusing on the consequences that might explain our financial difficulties, rather than deepening our understanding of why the company in which we have placed blind trust (or the industry in which it operates). ), has difficulties.
Finally, and this is human nature, we tend to blame our failures on external factors beyond our control. For example, we might be tempted to attribute the losses of certain companies in the tourism sector to bad weather conditions in summer. However, we overlook the importance of the quality of the products and services offered by companies or the hospitality of their employees.
And market enthusiasts in all this?
My recent work supports the literature on solving complex problems: Whether we are experts or beginners, understanding and mastering complexity is a daunting challenge.
Many market enthusiasts will demonstrate greater skill in developing an investment strategy, managing a portfolio, or accessing specific investments.
However, it is a mistake to assume that they can predict the uncertain behavior of markets. This is not necessarily about financial knowledge, but rather about the natural limits of human knowledge in the face of complexity.
Given the world of international finance, there is a “wall of complexity” that is particularly difficult to progress over, and we are all subject to bias and error.
So how do we navigate this situation?
Despite the many challenges that financial complexity presents, there is light at the end of the tunnel, provided we know what to do. Although many studies still need to be conducted, researchers remain optimistic about concrete methods that can already help us make more informed decisions.
1. Learn to think in systems
Systems thinking is a way of perceiving reality that helps us better understand and work with complex real-world environments.
Whether you want to learn how to better manage your budget or invest wisely in the stock market, get into the habit of drawing visual representations of the financial challenges you want to overcome.
Using cause and effect diagrams that use simple symbols (a + sign to show a change in the same direction between two factors and a – sign to show opposite changes), you can determine the extent and extent of a Problems quickly illustrate the relationships between parts of the same system.
But make no mistake, some factors are difficult to predict.
In short, learn to think about the “consequences of consequences” of your decisions before making a decision.
2. Be brave, tolerate uncertainty
Learn to tolerate situations that at first glance have no clear solution and that leave you in doubt.
Financial markets are unpredictable and poorly structured, leading to “wicked problems.”
In these environments, ambiguity is the norm. When we embrace uncertainty, we can turn problems into opportunities rather than making hasty decisions or becoming mired in inaction.
There is no “right” solution to a complex financial problem. Take a moment to evaluate your options.
3. Test your beliefs and biases
Do not attempt to research and interpret financial information based on any assumption you hold dear. Confront your preconceptions with sources you wouldn't normally consult because they take the opposite position.
What would a friend or colleague say that you like but fundamentally disagree with you?
4. Don't trust what comes to mind easily
Attending an inspiring conference on sustainable business or listening carefully to a television report on financial ethics is no guarantee that the information you gain will be helpful in the decision you need to make.
Although this information may be easier to recall from memory, it is not necessarily relevant. Don't overestimate the likelihood of an event just because you can imagine it in great detail.
Get information from multiple sources and check their reliability.
What now?
You cannot become competent in any area without the necessary practice. It is therefore important that you personally immerse yourself in the world of finance.
Through experience you develop your skills to better assess complexity. To help you with this, it is a good idea to enlist the assistance of a knowledgeable professional to guide you through this highly complex process.
But remember: when it comes to complexity, you are human, as are those who claim to be able to read the future.
This article is republished from The Conversation under a Creative Commons license. Read the original article.
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