Morgan Stanley IM: Pattern Recognition - Opportunities and Limits

• We explore the powers and perils of pattern recognition, which investors often cite as a basis for action.
• While it can be powerful when applied appropriately, it can also be misleading and lead to overconfidence.
• We define pattern recognition, discuss when it tends to work well, review why it may be misleading, and offer ways to help improve it.
• Pattern recognition tends to work well in stable environments where cause and effect are clear and feedback is effective but poorly where causality and feedback are limited.

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