Bullish, bearish wish-wash

If you are the least bit interested in the financial markets then chances are you have somehow got acquainted with the terms bullish and bearish with their constant chants over financial media. Truth be told these terms could not have been used more incorrectly than they are right now.

To understand this we need to start distinguishing (correctly) between ‘probability’ and ‘expected outcomes’ (aka results).

Lets say I expect that the chances (probability) of the market going up are 70%  while the chances of it going under are 30%. Simple math so far. And it is here where the usage of being bullish and bearish is applied by the financial mass media.

But there is one more thing you need to consider to get the full picture, and that is- by how much will the market rise or fall. Lets say average market jump (in case of a rise) is 4% and in case the market falls it can go down by as much as 40%.

As you can see in the table below, the expected outcome (expectation) is majorly negative (-0.092) for the market as a whole. This means I am bearish even when the media says there are 70% chances that the market is expected to go up with a 4% jump.

Case Probability Change Outcome
Rise 70% 4% 0.028
Fall 30% -40% -0.12


Categories: #finance


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