Thought For The Day… Random Human Action

“The important point is that demand is essentially a stochastic variable because human action can never be predicted perfectly, hence the balance of demand and supply should also be viewed in a probabilistic way.”  Hideki Takayasu and others

So, let’s define “stochastic” for the everyday person…  Stochastic means random.

I read this sentence this morning and thought of my approach to financial advice.

I think it is fair to state that we have general tendencies that can be predicted.  We also acknowledge that we are constantly changing our decisions based on new information.  So, how do we factor in this random variable, human action, into our models?

For an advisor, it is the personal financial review from time to time.

Many processes factor in the randomness of investment returns, tax rates, etc…  This is easy to report with a proper model using statistics.  One of the challenges for the advisor is getting personal feedback matching the reports to the individual at that moment.

Have the goals changed?  Do we have new experiences that impact a person’s feelings towards their goals?  Do we have updates in the information that may impact the model?

Luckily for me and my clients, the model I use has been designed to update fairly easily. This may mean better information for better decisions for the client.  Ultimately, this may increase their likelihood for success.

Here is the paper where I read the thought.  The paper has nothing to do with financial advice.  Fractals Properties in Economics http://arxiv.org/ftp/cond-mat/papers/0008/0008057.pdf

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About Christopher Hessenflow

Christopher Hessenflow is a financial planner in the Chicago area. He works with all sorts of people who are much more interesting than he is. He enjoys his career which lends him time to think and, sometimes, be creative. Chip was born bald.
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