Persistence of Diversity in Investor/Trader Beliefs

Is there a “correct” (or at least most correct) view of what will happen in financial markets and why it will happen? If so, why do the beliefs of market participants, sophisticated and naive, never converge narrowly to that view? Why do we disagree so much all the time? The following items offer some ideas, from a generally behavioral perspective, on the persistence of diversity in investor/trader beliefs. Specifically:

Classic Essay: The Foolish, the Theoretical and the Practical: “…it seems that nature to a significant degree favors diversity over survival of the fittest.”

Why Gurus Go to Extremes: “…forecasters trying to beat other forecasters tend to take extreme public positions that reflect the motivational bias of competition.”

The Diversity and Persistence of Quacks: “…naive customers for services with outcomes for which it is hard to distinguish skill from luck will attract and sustain a diverse set of quacks.”

How Investors Do (or Don’t) Take Advice: “…the difficulty of successful investing/trading probably makes many investors/traders underestimate their own knowledge/abilities and overestimate the knowledge/abilities of advisors.”

Holding Court with Stock Market Gurus: “…investors/traders should consider a courtroom-like discipline in determining the value of a guru’s advice. It may be that very few stock market gurus would qualify as expert witnesses.

Seer-Suckers, or the Efficient Everything Hypothesis: “No matter how much evidence exists that seers do not exist, suckers will pay for the existence of seers.”

One interpretation of such observations is that (complex) financial markets are highly forgiving of “errors” and “irrelevancies” and “irrationalities.” Fundamental characteristics of the markets seem to value diversity persistence, as something like a hedge against market collapse due to large unpredictable variations in market internals or externals. There may be some analogies with biological evolution and a generalized human behavioral evolution. The system characteristics that support/encourage diversity are strong enough to balance system tendencies to optimize (natural selection), thereby strongly inhibiting any non-adaptive stasis.

Another interpretation is that the “errors” and “irrelevancies” and “irrationalities” are hypotheses awaiting power law-generated evidence. They appear erroneous or irrelevant or irrational in the context of assumed tame distributions.

In summary, while financial markets may be adaptive, the adaptive process appears to be very messy, strongly preserving a wide diversity of investor/trader beliefs.

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