As a reminder, there are two key reasoning methods to our analytical framework:

1. The rate of change over time is more important than the level.

2. Bayesian Reasoning is better suited to investing than Frequentist Reasoning.

Rate of Change Over Time

For example, driving at 100 miles per hour is your speed.

If you maintain that speed your rate of change is 0.

If you go from 100 miles per hour to 0 miles per hour that is a negative rate of change or deceleration.

If you go from 100 miles per hour to 200 miles per hour that is a positive rate of change or acceleration.

Now, if you go from 100 miles per hour to 0 miles per hour in 60 seconds that is a leisurely pace to a full stop.

If you go from 100 miles per hour to 0 miles per hour in 0.1 seconds…well you are pink mist i.e. the rate of change is a life or death matter.

You might think that example is humorous but not applicable to markets or economies. If so, I invite you to go speak with the stockholders of Silicon Valley Bank, First Republic Bank, and Credit Suisse.

I will wait.

Bayesian Reasoning vs Frequentist Reasoning

Imagine you're trying to determine if the driver near you is drunk based on how they're driving.

Using a Frequentist Analytical Approach is like saying:

• A drunk driver is on the road near me on average 1% of the time.

• Therefore there is a 1% chance at any given moment a drunk driver is near me.

It's a static rule based on past observed behavior to inform one’s judgment.

On the other hand, using a Bayesian Analytical Approach is like saying:

• Given that the driver in front of me is driving erratically for no obvious reason, there is a higher chance he/she is drunk.

• Moreover, it is 1 AM in the morning after New Years Eve and I am driving by a lot of popular bars so there is even a higher chance he/she is drunk.

• Furthermore, the car in front of me is a specific car model that has a higher rate of DUIs relative to others.

• Therefore, there is a very high chance under these specific conditions at this specific moment in time that the driver near me is drunk and therefore I need to increase my distance and consider a different route home.

It's a dynamic approach based on continuous ingestion of new information to inform one’s judgement.

Naturally, frequentist analysis requires less work since there is minimal need to gather new data since it is largely fixed rule based.

Bayesian Reasoning is clearly more work since it constantly requires gathering new information and computing updated probabilities to inform action.

Ask your Advisor if they use Frequentist or Bayesian reasoning in their investment process.

You decide what analytical approach you prefer for your wealth management.