Blog: Dangers of Decision Making Under Complexity
Complacent rather than Ballistic Behavior reigns in the market.
While there are many signs of inflation risk ahead, the stock markets have generally ignored them. There are many reasons for this including:
- Belief that tariff threats will not be realized,
- Belief that tariffs will not result in inflation,
- Belief that any economic slow-down will not cause a recession, and
- Belief that the Fed will rescue the economy either way.
Much of this behavior is tied to how poorly humans make decisions when there is a time lag between action and reaction. Trade wars have been threatened, but not implemented. The tariffs that have been enacted have not yet resulted in price increases. It follows, by this logic, that there will be no price increases.
There is also a natural tendency to think in linear terms. That is for each action there is an equal reaction in a bastardization of Newtonian physics. But often there is a non-linear reaction. That is, for an action there will be a larger reaction.
Both of these characteristics fall under the category of Complex Decision Making, which I've written about in the past. With the US market erasing it's Tariff Tantrum drop and sentiment turning more bullish, I thought it might be a good time to discuss complex decision making.