Sunday, February 16, 2014

Investment decision-making on the micro level




I like to read investment books just to see how others are thinking about the markets. On a recent trip, I read Kenneth Posner's Stalking the Black Swan: Research and Decision Making in a World of Extreme Volatility. I was expecting a practical approach to thinking about the work of Nassim Taleb's path-breaking work on extreme market moves and Black Swans. What I got was a thoughtful piece on how to be a good financial analysts. This was a good surprise as Posner goes through the trials and tribulations of being an analyst who is trying hard to get things right but will get surprised in spite of their hard work. You need to get the framework right to be a great analyst.  

His rules for avoiding Black Swan events requires being quick on your feet to changes and following a couple of good rules.
  • Focus on the critical issues; know what are the return drivers.
  • Think in probabilities; the world is not certain.
  • Study the power of new information; it could be a catalyst.
  • Watch and eliminate cognitive dissonance; it is lurking in our thinking when we are not precise.
  • Go simple when the environment gets volatile; complexity is your enemy when there is more uncertainty.
  • Change when you have to; markets are changing.





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