“Humans best process information when relationships are linear.” – William Sharpe
The key for any investor is knowing when relationships may switch from linear to non-linear. There can be countless example of when market behavior becomes non-linear, but our fallback position is to use linear tools. The reason for falling back on a linear world is simple, the thinking is intuitive; if X moves Y percent, there will be a known response in variable Z. Success comes from moving beyond what is easy. Learning to anticipate or model a non-linear event s difficult.