To pun the oft quoted musing, on being, by a fictional Danish prince, we continue addressing a topic we introduced in our July commentary: the need for investors to attempt to go beyond just noise vs. signal identification and to try and understand context.
A parallel could be drawn with the recessionary status of the US economy. There is currently much dispute among investors (let alone pundits) as to what the economic indicators are really indicating, with many indicators giving apparently contradictory signals and just as many expert opinions similarly at variance. From a US market investor’s perspective, the question of recession or not recession appears to be a matter of interpretation. Does one embrace the postulate that by rule of thumb measures the economy is already in a recession, or should an investor act on the basis that until the US National Bureau of Economic Research technically declare it so, the US economy is not in recession?
Alternatively, could one dare to step back and determine that perhaps this does not matter? And if so, identify instead what does: context.
Fixing a Hole
In his Jackson Hole remarks, Jerome Powell referenced the concept of “rational inattention.” His reference was made in regard to the observation that households and businesses pay more attention to inflation when it is high, compared with having reduced awareness when it is low; and that this influences decision-making.
The same concept could be applied to investors with regard to recessionary awareness: to what extent is heightened attention of recession causing confusion in investment decisions, which would be less clouded if the focus was less pronounced?
Culling for Context
This is where Plotinus has found that, if designed properly, AI trade decision-making can have a distinct advantage over its human counterparts. If provided with limit scope, a suitably deployed AI can sustain a context—the investment approach—if you will. This contextual understanding is capable of maintaining a consistency. It is not prone to becoming confused and clouding its decision-making process with hubris, whilst remaining fluid in determining what is signal and what is noise and understanding the dynamic exchange that they represent.
So, in the uncertainty that the markets currently present us with, perhaps investors should bravely go against the grain and seek out difference. Correctly constructed AI-based elements in your investment process may help you cull for context more effectively and help you make more informed investment decisions. ■
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