Counterfactuals, history, and market analysis

Counterfactuals of past events have taken the history profession by storm. While not always liked by traditional historians, the process of thinking through counterfactual examples has enlivened historical thinking and has created fresh views about critical historical events. Other say that these what-ifs are not really the study of history but just speculation and conjecture about an event - a parlor game that is not worth serious consideration. Counterfactuals investigate the chain of causality in hindsight. 

History counterfactuals have especially focused on big events like war to ask the simple question of what would have happened if the winner became the vanquished in a given battle. Would the tide of history have changed? If conditions change, would we live in an alternative universe, or is the tide of history inevitable. 

Counterfactuals can also be applied to economics and finance through simple thought experiments. What if Jerome Powell was not the chairman of the Fed? What if Great Britain did not have Brexit? What if there was less QE after March 2020? Of course, these examples are backward looking. The more useful exercise is to use counterfactuals about future events. 

Thought experiments, not forming a decision tree of probabilities, are often the bread and butter for the good forecaster. Counterfactuals can be run forward to develop different vivid scenarios and create alternative worlds. What if a Fed taper was announced tomorrow? These scenarios, often relying on past thought experiments, are foundational to market forecasting. Forecasting based on past data, probability estimates, and thought experiments enrich the choices of what may be possible. 

The classic proverb "For Want of a Nail" can be applied to counterfactual history. What the shoe was properly nailed? 

For Want of a Nail

For want of a nail the shoe was lost.
For want of a shoe the horse was lost.
For want of a horse the rider was lost.
For want of a rider the message was lost.
For want of a message the battle was lost.
For want of a battle the kingdom was lost.

And all for the want of a horseshoe nail.