Michael Shermer, the columnist for Scientific American, developed the concept of Darwin’s Dictum to describe how observation should be undertaken. “If observations are to be of any use, they must be tested against some view - a thesis, model, hypothesis, theory or paradigm. Facts do not speak for themselves but must be interpreted.
As noted by the Charles Darwin when told that he spent too much time on theory and should stick with just making observations,
“About thirty years ago there was much talk that geologists ought only to observe and not theorize, and I well remember someone saying that at this rate a man might as well go into a gravel-pit and count pebbles and describe the colours. How odd it is that anyone should not see that all observations must be for or against some view if it is to be of any service!”
Too often in the financial press, there is a premium on observation of some news or some event, but there is little theorizing on what a specific event means other than it must be related to the current behavior of the markets. How is event observation helpful other than pure presentation of facts? There should be a link between the new information and the theory of what describes market behavior. As important, is the news that we are seeing today at all out of the ordinary relative to similar events in the past. Is there truly a relationship between an event and market behavior? Do new facts fit within a theory or are they contrary to our current wisdom. Is the story being told consistent with theory as we know it?
There is a lot of news noise in the markets, reporting and quotes but limited analysis. This is why model are often need to provide a filter to the noise that is bombarding the markets.
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