What a beautiful article. Too bad I find it only now, most likely too late to enter a discussion about it. I will leave a not-too-long comment on it anyway, even at the risk of total tumbleweed.
First, much respect for a precise and concise description of the effect, and coming up with a great label for it at the same time. Don’t know if the term anti inductive in relation to markets originated here, but it seems everything on the Internet at least refers back to this post.
Now, I entirely agree on the description of the anti inductive property of markets. I would also add: this anti inductive property is precisely the reason why markets tend towards efficiency—assuming enough participants with enough talent and/or training are participating. Note: “tend towards” does not necessarily imply “reach it”, hence few if any markets are “efficient, period”.
That said, here is the point at which I respectfully disagree: I don’t think markets can be fully described as anti inductive.
I would add: the anti inductive property is only one of two key properties of markets. The other one being—you guessed it—the inductive property of markets.
This inductive element is at play before a combined and weighted (in terms of capital) observation effect destroys the observed pattern, the one that everyone naively believes in and thinks will go on forever. This inductive element is perhaps the main reason why a trend accelerates for some time—until it breaks under its own weight.
I would then form—somewhat simplistic, for the sake of brevity—the following hypothesis:
The inductive element of markets is related to, and perhaps equivalent with, what traders or technical analysts traditionally call momentum.
It is the tendency of market participants to look for patterns, find and observe them at their beginning, then to act upon it, and thereby, strengthening it.
The anti inductive element is what traders and analysts refer to as return to mean.
Any trend must end at some point, usually after it becomes overextended. Which often happens rather violently, thus forming a new trend in “the opposite direction”.
This takes place if a critical mass of market capital comes to the conclusion that the pattern is done and finished, and then acts according to that insight. In addition, their combined insight has to “right” of course. Either, in correctly identifying that the pattern was becoming overextended, or alternatively, by effectively make the pattern falter through their sheer capital’s actions’ force.
An aside: these two possibilites (that the anti inductive market forces were right, or that their actions made them right) are, in my view, essentially indistinguishable on markets. That’s more or less the corollary of the claim “the market can be wrong longer than you can be solvent”.
What a beautiful article. Too bad I find it only now, most likely too late to enter a discussion about it. I will leave a not-too-long comment on it anyway, even at the risk of total tumbleweed.
First, much respect for a precise and concise description of the effect, and coming up with a great label for it at the same time. Don’t know if the term anti inductive in relation to markets originated here, but it seems everything on the Internet at least refers back to this post.
Now, I entirely agree on the description of the anti inductive property of markets. I would also add: this anti inductive property is precisely the reason why markets tend towards efficiency—assuming enough participants with enough talent and/or training are participating. Note: “tend towards” does not necessarily imply “reach it”, hence few if any markets are “efficient, period”.
That said, here is the point at which I respectfully disagree: I don’t think markets can be fully described as anti inductive.
I would add: the anti inductive property is only one of two key properties of markets. The other one being—you guessed it—the inductive property of markets.
This inductive element is at play before a combined and weighted (in terms of capital) observation effect destroys the observed pattern, the one that everyone naively believes in and thinks will go on forever. This inductive element is perhaps the main reason why a trend accelerates for some time—until it breaks under its own weight.
I would then form—somewhat simplistic, for the sake of brevity—the following hypothesis:
The inductive element of markets is related to, and perhaps equivalent with, what traders or technical analysts traditionally call momentum.
It is the tendency of market participants to look for patterns, find and observe them at their beginning, then to act upon it, and thereby, strengthening it.
The anti inductive element is what traders and analysts refer to as return to mean.
Any trend must end at some point, usually after it becomes overextended. Which often happens rather violently, thus forming a new trend in “the opposite direction”.
This takes place if a critical mass of market capital comes to the conclusion that the pattern is done and finished, and then acts according to that insight. In addition, their combined insight has to “right” of course. Either, in correctly identifying that the pattern was becoming overextended, or alternatively, by effectively make the pattern falter through their sheer capital’s actions’ force.
An aside: these two possibilites (that the anti inductive market forces were right, or that their actions made them right) are, in my view, essentially indistinguishable on markets. That’s more or less the corollary of the claim “the market can be wrong longer than you can be solvent”.