The last two years have been full of one-off surprises. A global pandemic, supply chain disruptions, the Ukraine war. No wonder investors have had a hard time forecasting what is going to happen next. In fact, in such an environment of repeating surprises, forecasting errors are larger than normal not just because it is harder to forecast something where there is little to no historic precedent, but also because humans are prone to overreact to such one-off events. One natural tendency of analysts, economists, and humans, in general, is to overreact to the most recent events and project them into the future. Over the last twelve months, I have seen people claim that we will never leave the virus behind and will always have to live with social distancing restrictions, that supply chain disruptions will create a recession, and that the Ukraine war is only the beginning of World War III. Well, social restrictions are behind us (in North America and Europe) or soon will be (in Asia). Supply chain disruptions are sorting themselves out and freight costs between Asia and Europe/North America are falling rapidly, and we still haven’t had a recession. And as for World War III, the jury is still out, but at the moment, it seems an escalation of the Ukraine war to a NATO country is unlikely.
Also how do you marry reversion to the mean with powerlaws? Months ago you talked about a paper that showed how only a tiny percentage of all listed stocks outperform. As in my question is do you take the mean of that powerlaw or what sort of distribution do you use?
#5 is a bit strange wrt stock price forcasting, I have always heard, highway to hell but stairway to heaven. Elevator down and stairway up.
Also how do you marry reversion to the mean with powerlaws? Months ago you talked about a paper that showed how only a tiny percentage of all listed stocks outperform. As in my question is do you take the mean of that powerlaw or what sort of distribution do you use?