This isn’t another outburst about inefficiency or efficiency or what meme stocks mean vis-à-vis the end of the world, or what’s wrong with the newest investment generation. Nor is this a particularly valuable commentary about what you should do with your money, or who to hire, or trust, or distrust.
It’s just a simple two-minute missive about a framework for thinking about markets1 to keep your mind straight in an inherently crooked environment. Markets are not mechanical – and most of our tools of analysis that are built to divine the mind of the machine are sorely inadequate to disentangle all the elements that drive price changes, competitive evolution and investor preferences.
Academia, commonly with no skin-in-the-game, does an admirable job trying to explain, ex-post, why the world was the way it was … only to give us another rearview mirror to gaze at while we run headlong into a new environment that strangely doesn’t look like the one behind us.
For this reason, I love the “meme stock” phenomenon that has seen its unexpected sequel crash at the box office worse than Furiosa (for the record, I thought it was a fine movie – yes, I still go to movies). The existence of meme stocks speaks to a difficult truth about complex adaptive systems. Individual agents have varying assessments of informational value, and each defines “rationality” in a non-specific way, preventing any commonly defined Rationality (the capital R we all “learned”) to emerge. Rationality is to believe in what works.
Applied to Financial Literacy, it is essential that our financial educators become more willing to step outside of the modern finance folklore and present lessons on the nature of non-linear adaptive systems (most live outside of finance). It will be empowering for newly literate investors to understand that to consistently win via an informational advantage, the cost is extraordinarily high – and for an average investor, unattainable. On the margin, decision quality does not improve with slightly more information. On the margin, market efficiency does not improve with one more information-based agent. On the margin, more regulated disclosure does not benefit less informed investors. And on the margin, a Columbia MBA does not generate increased public market returns.
Instead, we need to understand that financial literacy is about savings, the cost of money, compound returns and optionality. Fundamental analysis, in the 1950’s parlance, is a language that helps one comprehend economics, finance and investment – but it does not generate superior returns. Markets and investment returns are non-ergodic. A series of individual investments over time does not create the same distribution as an ensemble investing together. Each agent should play their own game. They must understand risk from a skin-in-the-game perspective and be able to manage exposures that a universal construct can not replicate. Financial literacy is more about self-definition than it is about CAPM (Capital Asset Pricing Model).
So, intrepid investor, whether you followed the social media post that sent GameStop back above $50 per share, you were the one buying highly priced puts at said price, or you stood aside and marveled at why anyone would participate in such and endeavor -- you were are all rational … as long as you understood why you made that speculative wager. I suppose the takeaway is something along the lines of; knowing why is more important than knowing how.
Important Disclosures & Definitions
1 Inspired by: Schredelseker, Klaus. “There is No Unique Rational Decision Strategy in Financial Markets”. Journal of Portfolio Management, February 2022, pp. 153-163
AAI000700 06/04/2025
