The Concept of Financial Market Awareness
Financial market awareness is critical for an effective decision-making process and outcomes.
Avoiding this is like avoiding a plague
We can't understand the advances we made
We've tried to resist but it's so hard to say no
We're pretending to see what the future will hold
--Orchestral Manoeuvres In The Dark
At a family grill-out last weekend, a conversation with my brother turned towards the markets (not an unusual occurrence). Like many folks, he has a fair chunk of his net worth in both self-managed and professionally managed accounts. His long-term time horizon and passive management style place him squarely into the investor camp.
The recent credit market turmoil quickly became the centerpiece of our discussion. Through his information channels, my brother had heard something about escalating credit concerns and he was familiar with a few of the well-publicized actors such as Bear Stearns (BSC), Countrywide Financial (CFC), and Ben Bernanke. But he was unfamiliar with other factors and how they fit together to tell the current story. As I shared what I knew, the depth of my brother's questions grew. He clearly wanted to understand what was going on and how it might affect his financial future.
Essentially, my brother was seeking to improve his situational financial market awareness.
Situational awareness is a state of knowledge that precedes decision-making and performance which involves perceiving critical factors in an environment, understanding their meaning, and projecting what can happen to a system in the near future (Endsley, 1995). Accounts of expert financial decision-makers suggest that these individuals often possess acute situational awareness of markets (e.g., Lefevre, 1923; Soros, 1987; Steinhardt, 2001).
Essentially, financial market awareness is one's sense of the current market environment (Ford, Kent, & Devoto, 2007). Some questions that can help assess market awareness include:
How well do you understand current market terms and jargon?
What are the key factors currently at work in the financial markets?
How are these key factors interacting to influence important outcomes like prices?
What are the levels and trends of key metrics that reflect the current market landscape?
What market scenarios are plausible in the near future?
Answers to such questions help gauge your sense of "what's going on" in the markets.
Situational awareness is particularly important due to its conceptual position as a key antecedent to effective decision-making. In the context of finance, this means that the more familiar you are with the market environment, the better your financial decision-making process and outcomes.
Look no further than Todd Harrison for textbook examples of developing and maintaining financial market awareness. Practices such as routine assessment of his 'four primary metrics' and monitoring his key market 'tells' help Todd take the pulse of what is going on.
The importance of financial market awareness may seem 'obvious', but consider how often individuals make important financial decisions while possessing weak understanding of market context. Personally, I've been guilty of this many times. Ignorance of the market environment touches the professional ranks as well. For instance, I was recently chatting with a corporate friend making nine figure global capital expansion decisions who indicated little understanding of monetary and fiscal policies in Europe and Asia that might affect his projects.
In the interest of seeing both sides of the trade, I should note that there is a 'plausible rival hypothesis' arguing that some market participants, particularly investors with long-term decision horizons, don't need to routinely plug into financial markets and constantly assess what's going on. Under this premise, a granular following of markets might even be detrimental, leading participants to wrongly act on short-term noise rather than remaining true to long term signals.
Which view is correct? Testing such competing hypotheses is what makes for interesting research, cookie. For willing Minyans, there may be opportunity to participate in such a study at some point.
Meanwhile, look for more about developing and assessing financial market awareness in upcoming missives.
Endsley, M.R. (1995). Toward a theory of situation awareness in dynamic systems. Human Factors, 37: 32-64.
Ford, M.W., Kent, D.W. & Devoto, S. (2007). Learning from the pros: Influence of web-based expert commentary on vicarious learning about financial markets. Decision Sciences Journal of Innovative Education, 5(1): 43-63.
Lefevre, E. (1923). Reminiscences of a stock operator. New York: George H. Doran.
Soros, G. (1987). The alchemy of finance: Reading the mind of the market. New York: Simon & Schuster.
Steinhardt, M. (2001). No bull: My life in and out of the markets. New York: Wiley.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter