The Music of Chance

The most puzzling & even troubling aspect of market dynamics - that the best experts can be out-performed by happenstance. This story of the leading contender in a CNBC stock picking contest is a good illustration. She's a waitress who has no trading experience, who describes her method:

"Part of this was luck," she says. "A lot of it was a gut feeling, some eenie, meenie, minie, moe, and common sense."

This can be seen as an example of what Nassim Nicholas Taleb describes in The Black Swan: The Impact of the Highly Improbable - the most impact comes from events that are impossible to predict based on previous experience. As the story about the winning waitress puts it:

... it's also sign of what Paul Auster once called the "music of chance." Picking stocks is about luck as much as strategy. In a field of 375,000 contestants with 1.6 million portfolios, someone has to finish first.

To me this means that the best fund managers and stock pickers and quant models at best can match the performance of the market, over the long term. If they beat the market occasionally, it's random luck.

What does that mean for our understanding of large system dyanmics and financial markets in particular? Clearly the best experts and models should be heeded in order to ensure at least the performance of the market, but the holy grail of consistent market beating performance is a long way off, if it is achievable at all.