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- WEEKLY MACRO NOTE - Matters of Judgement
WEEKLY MACRO NOTE - Matters of Judgement
Matters of Judgement, Weekly Wrap Up, Realised vs Implied Volatility, Levels
Read Time: 9 mins
Judgement, like measurement, refers both to the mental activity of making a judgment and to its product.
Although accuracy is the goal, perfection in achieving this goal is never achieved even in scientific measurement, much less in judgment. There is always some error, some of which is bias and some of which is noise.
Trading and investing-related decision making is above all a matter of judgement.
If it were a matter of certainty, everyone would follow the same formula, generate the same risk-adjusted returns and leave nothing for anyone else.The efficient market hypothesis states pretty much this, all available information is always incorporated into prices at all times.According to this theory, the best strategy is to invest in a portfolio that combines the risk-free rate plus the market index, in different proportions, based on your risk tolerance.
The problem is that in practice it doesn't work, markets are not efficient.
Investing is a matter of judgment.
Kahneman et all. state there are really only two ways of evaluating processes of judgement:
observing how they perform applied to a large number of cases
knowing whether they conform to the principles of logic and probability theory
Judgements are prone to error.Noise, how widely scattered around the bullseye your judgements are, and Bias, how much your errors are skewed in one direction or the other, will always be present.
In investing, but also in business, life and other endeavours that require judgement under uncertainty, the key is to:a) have a logical and repeatable process b) endeavour to have the highest probability of a successful outcomec) attempt to continuously reduce noise and bias
This does not mean that you will always be right, but over a large number of cases, the probabilities should be skewed in your favour.
Moreover, a process should not be viewed as a static thing, it should be in constant evolution.As the game changes you have to change with it.
Let's get through our usual weekly wrap-up and then move on to some matters of judgment.
TABLE OF CONTENTS
WEEKLY WRAP UP
SENTIMENT
ECONOMIC CALENDAR
MATTERS OF JUDGEMENT
LEVELS FOR THE WEEKS AHEAD
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