Superstition & Pattern Recognition By: Gabriel PotterMBA, AIFA® 2014.11.05

We, as human beings, are biologically predisposed towards finding patterns and inferring relationships to improve our awareness.  The downside to this essential human feature is that we tend to create patterns that are not based in natural laws, but mere historical coincidence.  We find patterns that don’t mean anything useful towards anticipating the future, but only reflect the unrelated coincidences of the past.

Quoting Wikipedia, “Superstition is the belief in supernatural causality—that one event causes another without any natural process linking the two events—such as astrology, religion, omens, witchcraft, prophecies, etc., that contradicts natural science.”   Some common superstitions still make a roundabout sort of sense.  For instance, walking under a ladder is considered bad luck, but simple safety protocol should be enough to suggest that it’s little dangerous.  Breaking a mirror is supposed to bring seven years of bad luck, but it’s more likely that someone clumsy enough to break a mirror is likely to suffer other mishaps as well.  We have to pay attention to the natural causality of events.

October is often regarded with superstition and fear from investors, not only because of the presence of Halloween and the abundance of fear-mongering political advertisements, but because October has had some of the largest  stock market crashes in History, including Black Monday in 1987, Black Tuesday in 1929, and the culmination of the financial crisis in 2008.  It is unsurprising that investors have noted this historical pattern and approached the season with some apprehension.  Still, there is no evidence for a natural causality between market disaster and October.  As proof, let us consider October 2014.  The Dow Jones Industrial Average and S&P 500 both hit record highs, on Halloween of all days.  The natural cause for October’s market performance is simply good earnings data which has beaten analyst expectations.  Pure fundamental strength has trumped irrational superstition, at least this time.  Happy Halloween.

Gabriel Potter

Gabriel is a Senior Investment Research Associate at Westminster Consulting, where he is responsible for designing strategic asset allocations and conducts proprietary market research.

An avid writer, Gabriel manages the firm’s blog and has been published in the Journal of Compensation and Benefits,...

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