When thinking about GameStop, SPACS, leverage, inflation expectations, ESG, and fiscal policy infrastructure development to name a view 2021 topics, I find that I am often ex ante ignorant. I may not know as much as I should about these issues, but all of a sudden the topic becomes prominent in the news, so I have to gain quick knowledge. The required knowledge is not just digesting the news, but trying to understand the underlying causes and drivers. After the event, I may show ex post knowledge. Uncertainty has been resolved through gaining knowledge, but it is often too late to exploit this new knowledge.
So, the answer is to get more knowledge before the events? That solution does not resolve the issue because we cannot know everything, and we cannot always forecast where the next crisis or focus of attention will occur. Knowledge is a scarce resource, and our attention also has to be allocated efficiently. Everything piece of news cannot be given the same weight because it may just be noise.
What is required is a framework to increase the speed of adjustment for knowledge acquisition. There is actually two parts, a framework for attention and a framework for learning.
We do have some simple tools for the attention problem. Let prices do the talking. Trend-following is form of recognition priming and attention focusing. I cannot know everything, so I will focus on those markets that are moving.
Focused learning is a different problem. We have written on the ladder of causality which may be a helpful tool for thinking about linking information with price action. We have also discussed the issue of surprises and learning. The simplest approach which we find useful is an attempt to explain some phenomenon to a colleague through answering some simple question: What is going on? Why is this happening now? Who does it affect? How will markets react? This is purposeful learning. If you cannot explain, you need more study and avoid getting involved without further work. If you can answer those questions quickly and efficiently, it is possible to get ahead of the game.
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