Dec 4, 2013

Markets' Natural Levels And Natural Drivers

Recent hype of all sorts of data analysis, big data and expanding application of complex math make more and more media and people refer to macroeconomic indicators when explaining what is going on. This is OK for overviews and inconsequential analysis to fill up air time and gap between drinks. When it comes to analysis that would have impact on business and government decision these factors have to be  accompanied with understanding of real drivers behind processes. Rarely I hear this type though. We should not forget that real-world processes are driven by real people and companies making decision based on their incentives, beliefs, legislation, etc. Maybe it is the scientist in me speaking but we should always search for the reasons  for one thing or another to happen. That leads to the idea of the "natural level" of each market or any other field of interest.

The natural drivers of the agents in the system define the natural levels of the markets. It is their current status, beliefs and so on as mentioned above. Let me take the property market for an example. The economy growth (take any measure of it) and credit price and accessibility are among the factors that come to mind in explaining this market. However, there is another component that often goes silent and sets a natural level for it. This is the people and events in their lives that are related to buying, selling or renting a property. People get married and need home, babies are born and families need extra room for them, people also pass and property has to be sold out, people move town in search of better life and move socially that requires better or (alas) worse property. No matter how bad the market is, the market would be driven by these and similar events because these are real needs that have to met.

Not all markets have a natural level or at least this level is very difficult to be defined and explored. I believe the smart phones market is one fine example as its drivers have much more to do with mentality of people than real needs to be met. Unless checking Facebook statuses every 5 minutes is an organic need, of course. Same goes with any luxury item market. We could speculate here a lot and I am sure there are tons of books on it at the bottom line it is very difficult to quantify.

The discovery and understanding of natural levels and their drivers should be an organic part of any analysis for the government, business or other. This is in contrast with the approach imposed in the era of big data, data mining and statistical modeling where we start to rely on some algorithm to find the meaningful drivers for us. Building models solely on the natural drivers is often impeded by the requirement for intimate knowledge of the intents, motivations and so on of the agents. Research on it is expensive if possible at all. Fortunately, there are many cases that data is readily available or cheap to obtain.

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