A helpful guide to accumulate references to understand the real nature of markets and how we can use them.
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This PKM page is part of the open-asset-allocator project! If you want an application to help you manage an investment portfolio using asset allocation techniques and this knowledge, check it out!
https://github.com/benizzio/open-asset-allocator
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A great short introduction to understand traditional finance’s origin and persistent biases:
https://www.youtube.com/shorts/AUmHqD0lGHo
Much of what’s out there is built upon layers of this perception of how reality works in financial systems. This framework has a premise that does not reflect reality.
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If you keep sampling humanity for height, you can safely bet on an average between 170 cm and 180 cm at any point in time after a sufficient base sample. If you try to do that with individual wealth, you will be mistaken by multiple orders of magnitude. Just try inserting Bill Gates in the sample after the first 10K people or the first 10M people.
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Traditional finance is mostly based on probability models that follow normal (Gaussian) distributions or assumptions. This is worsened by human biases and the tendency for these models to “make sense,” since the systems we evolved to spend most time dealing with live in the domain of the Gaussian.
Markets, economies, societies, biological ecosystems, and multiple other examples are Complex Systems (https://en.wikipedia.org/wiki/Complex_system) that belong to domains that follow fat-tailed distributions.
A fat-tailed domain is an environment that looks like a Gaussian domain for a longer period of time but causes enormous ruptures when an extreme sample is added.
The change of domain implies the need to select different models and tools. In fat-tailed domains, models are not so easily accessible, so applying rigor in non-predictive, forecast-averse strategies is highly beneficial;
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Think weather. You can mostly trust the forecast a week forward to decide suitcase content and ignore the forecast for next year and just pay for an extra suitcase with extra equipment “just in case.” (Just remember: weather and climate are very different things).
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