Mullaney Keating & Wright

Independent Investment Professionals

Blog

MODELS

Physicists, weathermen, economists and many others try to describe reality by devising models that purport to describe and predict reality.  Predictive ability of such models is the acid test of their usefulness. Financial economists and various market analysts have developed many models of what drives stock (or bond) returns.  Even in physics no model is a perfect “theory of everything”.  And the more a model attempts to predict what happens when humans are involved in the process the less perfect can be the representation of reality.  This is especially true in stock market models.

In the attached Models_Uncertainty_and_the_Importance_of_Trust  Marlena Lee of Dimensional Fund Advisors describes the uncertainties of financial models of the stock market.  A little wonky but worth a try.

TFM