Tuesday is election night – so there's a lot of fear and uncertainty from both sides about the consequences.
So how do you track and understand that fear? With the CBOE's VIX.
The VIX is an index that's commonly known as the "fear gauge." It tracks how quickly asset prices move (or, in other words, their "volatility").
While you can't invest in it directly, you can invest in derivative products like VIX futures, ETFs, inverse ETFs, and more.
The infographic below is a good primer, and you can download RCM's full white-paper here.
Covid cases are building, the Senate didn't pass another support bill and is now adjourned until November 9th, and you have pre-election market jitters. As a result, the VIX trading volume is hitting new highs.
Overall, a higher risk environment than normal.
For context, the VIX has averaged 26.30 since August but got as high as 82.69 in March.
In the past week, after a pretty bad S&P 500 sell-off, it's gone back above 38.
There are many ways to study and use the VIX, but ultimately, tracking it in any form helps you understand the current state of fear in market participants.
I'd love to hear how you use the VIX or other tools to measure or forecast market stress and volatility.
In this talk, he mentions a lot of interesting stats, but notice how many are focused on the change (or rate of change) within a relatively small window of the available data.
Also, notice how he crafts a story around the direction of the numbers rather than acknowledging or contextualizing the numbers themselves. This isn't inherently bad – but it's something to be aware of when interpreting what it means to you.
When making decisions, the direction and intensity of movement are important, but so are more objective measures.
Stories can help make us comfortable with a temporarily bad situation, but if you get lost in the story and aren't cognizant of the bad situation, it can be harder to correct.
In trading, traders often tell themselves stories about why a movement happened, but markets and economies are more complicated than any heuristic. Those stories can be helpful retroactively – but they're rarely a powerful predictor.
Economics and trading both have hard sciences behind them. You can look at technical indicators, you can look at historical events, and you can build algorithms with advanced technology that look for the patterns you miss. But it's what you do with those inputs that matters.
Mark Perry wrote an article about why "it’s really hard to ‘beat the market’ over time." In it, he states that over the 15-year investment horizon, 92.43% of large-cap managers, 95.13% of mid-cap managers, and 97.70% of small-cap managers failed to outperform on a relative basis. Stated differently, over those 15 years (from June 30, 2003 to June 30, 2018), only one in 13 large-cap managers, only one in 21 mid-cap managers, and one in 43 small-cap managers were able to outperform their benchmark index.
It’s hard to admit to yourself that you aren't better than average. Nonetheless, over any period of time, this is true for half of us. This "truth" is especially hard to accept for people who have achieved a lot in their lives and have the money to invest.
The trick is to find a way to separate "luck" from "skill" … or to avoid being fooled by randomness.
We live in interesting times! The signal-to-noise ratio is already tough to deal with … and I suspect that we are in a period where we have to expect even more noise.
I've written a couple of posts on Economics that might help. Here are a few of the more popular ones, if you are interested.
We make decisions all the time. To make that easier, we use shortcuts to make processing more efficient, more effective, and more certain.
At least it feels that way to us.
Mental heuristics are great – they do often save us time or effort. And, for many people, they enable better decision making. But, as with any generalization, there are exceptions that can be dangerous.
That's where cognitive biases come in; we have biases toward how we remember things, how we view ourselves, how we make decisions, and what we make things mean.
We're all victims to them, to some extent. But hopefully, by understanding them and becoming aware of them, we can limit their impact.
I also know a lot of people that think they're smarter than they are (even the smart ones … or, perhaps, especially the smart ones).
It's common. So common, in fact, that there's a name for it. The Dunning-Kruger Effect.
Have you ever met someone who's so confident about what they think that they believe they know more than an expert in a field? That's the Dunning-Kruger effect. It's defined as a cognitive bias where a lack of self-awareness prevents someone from accurately assessing their own skills.
Here's a graph that shows the general path a person takes on their journey towards mastery of a subject.
The funny thing about the above image… it's actually not a literal part of the paper on the Dunning-Kruger Effect. But it's now so commonplace that people report that chart as fact. A fitting example of the effect.
In our daily lives, it can often be funny or frustrating to see the "victims" of this effect, but I'd warn you that we all have times where we're prone to this; and it's a sign of ignorance, not stupidity.
This is a problem with all groups and all people. Even if you already know about the cognitive bias resulting from the Dunning-Kruger Effect, you're not immune.
It should be a reminder to reflect inward – not cast aspersions outward.
Two different ways that people get it wrong, first is to think about other people and it’s not about me. The second is thinking that incompetent people are the most confident people in the room, that’s not necessarily true.
Usually, that shows up in our data, but they are usually less confident than the really competent people but not that much… – David Dunning
To close out, even this article on the Dunning-Kruger presents a simplification of its findings. The U-shape in the graph isn't seen in the paper, the connection that lack of ability precludes meta-cognitive ability on a task is intuitive, but not the only potential takeaway from the paper.
Regardless, I think it's clear we are all victims of an amalgam of different cognitive biases.
We judge ourselves situationally, and assume "the best". Meanwhile, we often assume "the worst" of others.
Early voting has started, but, if all goes to plan, we'll know who will be the President on November 3rd.
The fears of fake news and the growing echo chambers around candidates (and policies) mean it can be tough to truly make an educated decision. The reality is, most of our news sources are tinted by the lens of their ideology – which is okay. That means they're appealing to their targeted audience.
That being said, it may also be worth looking at the same news story from a comparative news source from the other spectrum – or even better, a primary source when it comes to science/economics.
Here's a chart that shows where news sources rank. You can click the image to go to an interactive version with more details. And, if you're curious about their methods, click here.
RealClearPolitics – Aggregates news from various sources, as well as writing their own opinion pieces. Also has a good visual on the current state of the presidential, senate, and house races.
Brittanica ProCon – Tracks the stated positions of politicians on various issues. Can be sorted by candidate, and by issue. It also has a quiz you can take to assess which candidate you actually resonate with.
Politifact & FactCheck – Both sites fact check presidential statements, party statements, and more. We know politicians often lie by omission, or focus only on the specific stats that are relevant to their point. Fact-checking helps you gain a more holistic picture.
As a last warning on believing anything you hear, most polls I've seen put Biden in the lead … but if you remember 2016, you know the polls are working on incomplete information. Clinton had a lead on most polls and lost to President Trump.
It's election season! Early voting is now open in most places.
Regardless of your preference, it doesn't count if you don't vote.
Gandhi once said, “Be the change you wish to see in the world." This wasn't exactly what he meant … nevertheless, one of the ways you can impact the world is by impacting who gets chosen to represent us in government.
2020 has shown how important choosing the right leader is for the country and each of us.
I have friends on both sides of the political spectrum, and I hear complaints from both sides. The one thing we all can agree upon is that not enough people (who claim to care) actually get out and vote.
It is one thing to whine about the status quo … It is quite another to get up, get out, and do something about it.
Combat fake news and media sensationalism by doing some research choosing candidates you think will leave us better than they found us.
If you're not sure where your polling location is, check here.
It's an interactive video that uses your webcam to walk you through the various assessments on BMI, emotion, beauty, etc. At the end, it'll give you your life expectancy, and then your "normal score".
It's not the most complex use of AI, but it provides interesting insights, and is becoming increasingly prevalent.
Governments, police stations, retail stores, etc. all use this technology to track individuals, and if you remember one of my previous articles – there are plenty of cameras to go around.
If you did the demo, were you surprised by the results?
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David Fitzsimmons via 
