Probability of Another Bear Market – Do Not Listen to Frequentists

By now you already know the market nosedived, plummeted, crashed today – losing 4.5% in just one day. We are down 10% from the peak set in May.

Analysts are quick to call this a correction – by their definition a drop of 10% from peak means we are in correction territory.

Are we going into another bear market ( 20% or more loss from the peak)?

Briniyi Associates has this to say about chances of a bear market

Since 1962, there have been 25 corrections greater than 10% during bull markets. Nine of these instances became bear markets. Historically there is a64% probability that this is only a correction and not the start of a bear market.

The math is not complex to see, in 16 of 25 past corrections we did not enter bear market so they say the chances are 64%.

This is the classic or the frequentist approach that simply counts the instances and assigns a probability to next recession.

But is that correct or relevant?

Estimating the chances of next bear market is not about counting but about estimating the (un)certainty. Will we enter a bear market? Not easy to answer – definitely not by counting the sample space or the outcomes. Probability in this cass ceases to be a ratio of two countable events and becomes a representation of hunch, degree of belief, gut feel or a hypothesis.

Again, is a bear market just around the corner? We don’t know and neither do those analysts with their incorrect use of probability.