The daily ritual of seeking market color, the reasons behind daily market movements, unites finance professionals across various sectors and regions. However, the value of this ritual is often questioned, as daily market fluctuations may not have significant impacts in the long run. Speculating on the reasons behind market movements can lead to arbitrary explanations that may not accurately reflect reality. This quest for market color may often result in a sense of wasting time and obtaining useless information.
The distinction between different types of analytics, such as descriptive, explanatory, predictive, prescriptive, and automated, can shed light on the market color puzzle. While predictions may seem more appealing due to their concrete outcomes, explanations alone may not be practical for decision-making. Predictions are crucial in modern AI, driving advancements in various fields, but they may lack explanations, leading to blind reliance on the outcomes without understanding the underlying processes.
Predictions without explanations can be compared to oracles, demanding unquestioning compliance and fostering superstitions. In contrast, explanations without predictions may seem irrelevant and detached from real-world applications. The field of explainable AI (xAI) aims to provide insights into black-box predictions generated by AI models, enhancing trust in the outcomes. In finance, predictions and explanations are often intertwined, with each influencing the other in a complex relationship.
The search for market color in daily movements may not solely focus on predictions or explanations but rather on identifying early warning signs of potential extreme market events. Finance professionals may be akin to fishermen at sea, extrapolating information from daily market movements to anticipate future trends and potential risks. Instead of relying on oracles or sophists, they should aim to be good prophets, warning of possible calamities that could arise if current trends continue.
By viewing explanations and predictions as perpendicular dimensions rather than endpoints of a spectrum, finance professionals can seek a balance between understanding the reasons behind market movements and predicting potential outcomes. The goal is not to predict the future with absolute certainty but to identify potential tail events based on current market data. In this sense, the search for market color becomes a quest for early warning signs and red flags that could indicate impending market extremes.
In conclusion, the daily ritual of seeking market color among finance professionals may serve as a means to anticipate potential tail events in the market. By striking a balance between explanations and predictions, finance professionals can act as prophets, warning of possible risks and guiding decision-making processes. Rather than relying solely on predictions or explanations, the focus should be on identifying early indicators of market shifts and preparing for potential extremes. Like Jonah warning the people of impending calamity, finance professionals can strive to be vigilant and proactive in navigating the ever-changing financial landscape.
