It is striking that the Fed admitted it made a mistake. Michelle Bowman gave a speech in London that should raise some eyebrows. Note that the speech was given outside the country. The key findings are listed below, but most surprising is that the review suggests a risk-averse culture among regulators. Better to do nothing than take some action. The bank regulation is done at the regional bank level. For all the speeches and economic research that is done at the regional Fed level, shouldn’t they get this right? It is not clear that centralization would be better, but this is interesting food for thought.
Now, the question is what will Governor Bowman do about this?
An investor can generate returns based on their knowledge. The knowledge used creates an information edge that may allow you to earn a higher return than the market portfolio. To determine an information edge, ask what your level of knowledge is about a topic or firm. We focus on tacit knowledge, the expertise from practice and experience. There is ubiquitous tacit knowledge available to most, and specialist tacit knowledge focused on a much smaller set of individuals.
Ubiquitous tacit knowledge exists in a number of degrees. We can start with beer-mat knowledge, which is a simple description. For example, the Fed controls monetary policy. There is popular knowledge, which you may read in a newspaper, and primary-source knowledge that may come from research analysts and academic articles. These are all fine, but they will not create an edge.
Specialist tacit knowledge can come in two forms: interactional expertise, which shows you can critically evaluate information and use it, and contributory knowledge, which shows mastery and the ability to use that knowledge to develop unique thinking.
If you want to know whether you have an edge, then ask what your level of knowledge is. If you don’t have a specialist’s level of knowledge, you are unlikely to have a chance of beating the market.
[T]o trace something unknown back to something known is alleviating, soothing, gratifying and gives moreover a feeling of power. Danger, disquiet, anxiety attend the unknown – the first instinct is to eliminate these distressing states. First principle: any explanation is better than none … The cause-creating drive is thus conditioned and excited by the feeling of fear.
- Nietzsche hat tip top fs.blog.com
The unknown requires clear understanding, even of complex situations. We want to find causes for everything. If we have an explanation for the unknown, there is comfort and power. One creates sensemaking by substituting discontinuous concepts for continuous perceptions. Investors like a clear cause-and-effect flow.
What is the story here? And what will happen next? We use stories to make sense and to justify decisions or positions. Yet stories are often simplifications that make life easier and are not always the best tool for understanding a complex world.
