During the pandemic, not worrying too much about the stock market might be the best investors can do, write Nicolas Martelin and Jamie Nes

Martelin, Nicolas

Ness, Jamie

English

LSE Research Online

Coronavirus and the stock market: science cannot predict the outcome, but does it matter?LSE Research Online URL for this paper: http://eprints.lse.ac.uk/104401/Version: Published VersionOnline resource:Martelin, Nicolas and Ness, Jamie (2020) Coronavirus and the stock market: science cannot predict the outcome, but does it matter? LSE Business Review (23Apr 2020). Blog Entry. lseresearchonline@lse.ac.ukhttps://eprints.lse.ac.uk/ ReuseItems deposited in LSE Research Online are protected by copyright, with all rights reserved unless indicated otherwise. They may be downloaded and/or printed for private study, or other acts as permitted by national copyright laws. The publisher or other rights holders may allow further reproduction and re-use of the full text version. This is indicated by the licence information on the LSE Research Online record for the item.Coronavirus	and	the	stock	market:	science	cannotpredict	the	outcome,	but	does	it	matter?As	always	in	times	of	market	turmoil,	investors	turn	to	financial	experts	to	understand	what	is	going	on	with	theirsavings.	More	specifically,	they	want	to	figure	out	what	to	do	with	their	financial	investments:	Is	it	the	right	time	tosell	or	is	it	better	to	purchase	what	seems	like	cheaper	stocks?It	results	in	a	steep	increase	in	information	demand	about	financial	markets.	Google	trends	reports	that	the	numberof	searches	containing	the	word	“markets”	increased	by	more	than	350%	between	mid-February	and	mid-March.This	demand	for	financial	information	is	well	understood	–	and	well	met	–	by	journalists	who	are	writing	abundantlyabout	the	topic.The	problem	is	that	no	expert	or	article	will	ever	be	able	to	provide	you	with	market	timing	advice	in	a	time	like	this.Simply	put,	the	effect	of	such	a	global	pandemic	on	financial	markets	is	unprecedented	and	we	cannot	open	anyfinancial	history	book	to	search	for	answers.	Less	simply	put,	investment	theory	in	times	of	turmoil	resembles	morean	art	than	a	science.As	Robert	Shiller	explains	in	a	recent	New	York	Times	article,	“there	is	no	purely	scientific	way	to	forecast	turningpoints	in	the	stock	market	in	light	of	the	kind	of	changes	we	have	seen	recently.	Unfortunately,	we	just	have	toaccept	it.”The	abundance	of	information	about	the	current	stock	market	condition	might	just	be	a	way	to	reassure	ourselvesthat	we	can	have	some	sort	of	rationale	over	our	investment	decisions,	but	science	is	missing	in	action.	Let	usreview	why.Of	course,	science	encompasses	more	than	just	mathematics,	physics,	chemistry,	and	other	“hard	sciences”	thatfind	their	roots	in	the	natural	world.	Science,	at	its	core,	is	predictable	and	perpetual;	meaning	that	scientificoutcomes	are	causal	and	built	on	previously	held	knowledge.	Moreover,	science	is	characterised	as	a	system	ofrelations	yielding	explainable	invariant	outcomes.	This	is	to	say	that	facts	that	demonstrate	consistent	patterns	orpredictable	outcomes	can	be	classified	as	scientific.	Market	forecasts	in	unpredictable	pandemic	situationsdefinitely	fail	to	fulfil	this	definition	but	isn’t	it	the	case	under	any	market	conditions?The	field	of	finance	relies	on	a	set	of	theories.	In	particular,	the	notion	of	efficient	markets	is	a	point	of	contention,as	it	argues	that	market	outcomes	cannot	be	predicted	through	randomness.	With	market	movements	beingcharacterised	by	a	random	walk,	market	forecasting	under	any	sort	of	condition	could	be	viewed	as	unscientific.LSE Business Review: Coronavirus and the stock market: science cannot predict the outcome, but does it matter? Page 1 of 2		Date originally posted: 2020-04-23Permalink: https://blogs.lse.ac.uk/businessreview/2020/04/23/coronavirus-and-the-stock-market-science-cannot-predict-the-outcome-but-does-it-matter/Blog homepage: https://blogs.lse.ac.uk/businessreview/However,	it	may	not	be	fully	appropriate	to	exclude	so	quickly	the	forecast	on	stock	prices	from	the	scientific	arena.For	instance,	predictability	is	not	a	necessary	condition	to	qualify	a	field	as	scientific.	A	chaotic	system	–	althoughunpredictable	–	can	be	scientifically	defined.	Bernoulli	models	provide	an	example	of	such	a	case,	as	they	capturethe	probability	distributions	of	random	variables.	Randomness	is	even	a	prerequisite	for	the	application	ofprobabilistic	theories.	Moreover,	it	may	not	be	the	case	that	sciences	are	fundamentally	predictable.	For	instance,Werndl	examines	some	of	the	arguments	that	could	render	Newtonian	physics	unpredictable.Moreover	market	forecasting	has	also	often	been	treated	as	a	science	in	the	past.	Indeed,	in	the	19th	century,economist	Jules	Regnault	likened	the	field	to	science	in	his	book	“Calcul	des	chances	et	philosophie	de	la	bourse”(1863).	Later,	Louis	Bachelier	wrote	his	doctoral	dissertation	in	mathematics,	“Théorie	de	la	spéculation”	(1900),	onfinancial	markets,	focusing	on	stocks	and	options,	and	the	mathematical	modelling	of	price	movements.	Similarly,Benoit	Mandelbrot	(1983)	applied	the	geometric	concept	of	fractals	to	model	market	movements	in	an	attempt	toexplain	the	occurrence	of	large	price	fluctuations.Therefore,	the	forecast	of	financial	markets	can	be	viewed	as	a	science	that	is	imperfect	and	subject	to	uncertaintyand	risk	since	it	is	exposed	to	probabilistic	forces.	In	the	current	situation,	uncertainty	is	at	its	peak.	This	rendersmarket	forecasting	trickier	than	ever.	However,	in	times	where	most	of	our	bearings	are	shattered,	it	could	bereassuring	to	remember	that	there	is	one	key	difference	between	finance	and	the	other	“hard	sciences”:	it	is	ourhuman	decisions	that	generate	market	outcomes;	not	some	natural	law	against	which	we	are	powerless.Our	behaviours,	actions,	decisions,	and	sentiments	ultimately	affect	the	movements	of	financial	markets.The	weakness	of	finance	as	a	science,	just	like	any	other	social	science,	is	most	certainly	its	lack	of	predictivegeneral	law.	Ironically,	we	believe	that	it	is	also	its	strength	in	times	of	turmoil	and	confusion.	We,	investors,	makethe	outcome	of	any	given	trading	day.	And	so,	following	Robert	Shiller’s	advice	of	not	worrying	too	much	about	themarket	might	be	the	best	deed	we	can	do	to	give	us	peace	of	mind	and	to	give	the	market	some	stability.♣♣♣Notes:This	blog	post	expresses	the	views	of	its	author(s),	not	the	position	of	LSE	Business	Review	or	the	LondonSchool	of	Economics.Featured	image	by	geralt,	under	a	Pixabay	licenceWhen	you	leave	a	comment,	you’re	agreeing	to	our	Comment	PolicyNicolas	Martelin	is	a	professor	of	finance	at	the	Jack	Welch	College	of	Business	&	Technology,	ofSacred	Heart	University	in	Luxembourg.	His	main	area	of	expertise	is	behavioural	finance.	Moreinformation	is	available	on	his	faculty	page.		Jamie	Ness	is	a	graduate	student	at	Carleton	University	in	Ottawa.	Her	main	research	interests	arethe	philosophy	of	finance	and	sustainable	finance.			LSE Business Review: Coronavirus and the stock market: science cannot predict the outcome, but does it matter? Page 2 of 2		Date originally posted: 2020-04-23Permalink: https://blogs.lse.ac.uk/businessreview/2020/04/23/coronavirus-and-the-stock-market-science-cannot-predict-the-outcome-but-does-it-matter/Blog homepage: https://blogs.lse.ac.uk/businessreview/

Coronavirus and the stock market: science cannot predict the outcome, but does it matter?

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Coronavirus and the stock market: science cannot predict the outcome, but does it matter?

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