Do low rates lead to higher stock prices? The logic goes: low rates give us higher present values and thus lead to higher equity values. Is this argument valid?
Reductive thinking is also widely used in financial forecasting, using the same seductive “because of A , B will happen” formula.
Reductive statements do more harm than good because they cause traders to confuse correlation with causation, and believe that markets are easy to understand.
Nassim Taleb summed up reductive thinking very well: “As much as you believe in the ‘keep-it-simple-stupid’ it is the simplification that is dangerous.”