“We are pattern seekers, believers in a coherent world, in which regularities [...] appear not by accident but as a result of a mechanical causality or of someone’s intention. We do not expect to see regularity produced by a random process, and when we detect what appears to be a rule, we quickly reject the idea that the process is truly random. Random processes produce many sequences that convince people that the process is not random after all”. In his lifetime’s account [1] of how we make choices Daniel Kahneman breaks down the process by which individuals seek speculation where in fact none exists. During a recent seminar I was called on for a question about speculative attacks on euro sovereign debt: it might be extremely easy to construct an appealing story that explains why Italy’s (and other countries’) bond markets got seized by global speculators trying to harm poor retail investors as law makers arranged a crusade against infidel hedge funds offshore in response.
Unfortunately, there seems to be no clear-cut confirmation about the causal origins of speculative attacks on sovereign debt. Even if this were indeed the case, the fact a random process accounts for much of its explanation is no reassuring at all. We must be able to pin down an exact causation between market fluctuations and fundamental changes in the economic and underlying environment. A random process is no answer to a deterministic relationship between volatility and underlying causes. Investors, as individuals, want to understand reality even when the sample at hand is extremely small to attempt any inference. One thing to bear in mind is that jumping to obvious conclusions might be too tempting to ignore: ultimately, as speculators know a witch must be responsible for all the world’s evil.
[1] Daniel Kahneman, 2012, Thinking, Fast and Slow, Penguin Books.
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