Ben Carlson on why is it so difficult to predict what transpires in the financial markets:
Peter Bernstein in Against the Gods: The Remarkable Story of Risk lays out three reasons regression to the mean can be such a frustrating guide to the investment decision-making process:
- Sometimes it happens at such a slow pace that any shock to the system can disrupt the process.
- Sometimes the regression happens so swiftly it overshoots to the upside or downside.
- Sometimes the mean itself is unstable, meaning yesterday’s normal can be replaced by a new normal if something has changed within the system.