Related: A lot of people seem to think that the next recession is “coming up” more so than usual due to the fact that we’ve now had a long economic boom. Isn’t this pure gambler’s fallacy?
It’s not gambler’s fallacy if recessions are caused by something that builds up over time (but is reset during recessions), like a mismatch between two different variables. In that case, more time having passed means there’s probably more of that thing, which means there’s more force toward a recession. I have no idea if this is what’s actually happening, though.
I think it’s more about what the world looks like at the end of a long economic boom: the price/earnings of the overall market is really high, since valuations have grown faster than the underlying economic earnings. I think of P/E as a measure of market enthusiasm—high P/E means people have strong expectations of future growth. Historically, it seems that markets are magically corrected to mirror the actual growth of the economy over the long run. Currently the Schiller P/E is well above it’s average—meaning the market may be ‘over-valued’. We just don’t know what the actual ceiling on this figure is—which is why it’s hard to time the market.
Re: gamblers fallacy, I think the greater the over-valuation, the greater the probability of a ‘market correction’ - these changing probabilities mean it’s not really a gambler’s fallacy situation—chance of correction is not independent or truly random.
You seem to think that the economy and markets are random without memory or state. You are the one with a fallacy called: “the map is not the territory”.
Related: A lot of people seem to think that the next recession is “coming up” more so than usual due to the fact that we’ve now had a long economic boom. Isn’t this pure gambler’s fallacy?
It’s not gambler’s fallacy if recessions are caused by something that builds up over time (but is reset during recessions), like a mismatch between two different variables. In that case, more time having passed means there’s probably more of that thing, which means there’s more force toward a recession. I have no idea if this is what’s actually happening, though.
I think it’s more about what the world looks like at the end of a long economic boom: the price/earnings of the overall market is really high, since valuations have grown faster than the underlying economic earnings. I think of P/E as a measure of market enthusiasm—high P/E means people have strong expectations of future growth. Historically, it seems that markets are magically corrected to mirror the actual growth of the economy over the long run. Currently the Schiller P/E is well above it’s average—meaning the market may be ‘over-valued’. We just don’t know what the actual ceiling on this figure is—which is why it’s hard to time the market.
Re: gamblers fallacy, I think the greater the over-valuation, the greater the probability of a ‘market correction’ - these changing probabilities mean it’s not really a gambler’s fallacy situation—chance of correction is not independent or truly random.
Ray Dalio’s explanation seems pretty plausible to me, though I definitely don’t have the gears to fully evaluate it: https://www.youtube.com/watch?v=PHe0bXAIuk0
You seem to think that the economy and markets are random without memory or state. You are the one with a fallacy called: “the map is not the territory”.