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The other day, I came across an exchange on X where an American trader posted a confident thesis: AI would compress revenues of Indian IT companies like TCS and Infosys. Reasonable concern. Many analysts have raised it. But then he took the argument several steps further.
If IT revenues fall, he reasoned, India's current account deficit would widen by that amount. If the deficit widened, the rupee would weaken. Therefore, the real trade was to short the Indian rupee. Sounded like a neat chain of logic.
The problem was, as several people pointed out, the chain doesn't work that way. A weaker rupee would make Indian exports cheaper and more competitive, which would tend to reduce the deficit, not widen it endlessly. The currency and the current account don't move in a straight line. They move in a loop, each influencing the other, as the system constantly adjusts and corrects itself.
I found this amusing but also instructive, because Indian retail investors make precisely the same mistake all the time. It's the habit of taking a single fact or trend and extrapolating it forward in a neat, unbroken trajectory. As if nothing else in the system will respond or adjust along the way. As if there will be no second or third-order effects.
You see this everywhere.
A company reports two weak quarters, and investors conclude it's in permanent decline. Ignoring that management might cut costs, pivot strategy, or benefit from a competitor's stumble. A sector booms for eighteen months, and suddenly everyone assumes the boom continues indefinitely. Ignoring that high returns attract new capital, increase competition, and eventually compress margins. Oil prices spike, and consensus instantly forms that inflation will spiral and the economy will stall. Ignoring that higher prices reduce demand, encourage substitution, and trigger policy responses.
Let me give you a specific example I saw firsthand. In early 2022, a reader wrote asking whether he should exit all his equity mutual funds because inflation was rising sharply and the Fed had started hiking rates. His logic: higher rates mean lower stock valuations, therefore markets will fall, therefore he should get out now and re-enter when things stabilise. The chain sounded reasonable. Inflation was real. Rate hikes were real. The predicted consequence seemed inevitable.
What he missed: markets had already priced in much of the rate hike cycle. Companies were adjusting their business models. Some sectors actually benefited from higher rates. And his plan to 're-enter when things stabilise' assumed he'd time both the exit and the entry correctly, which almost nobody does. Two years later, someone who stayed invested through that period is comfortably ahead of someone who got out and is waiting for clarity.
In each case, the thinker has identified a real fact but then projected it forward in a straight line without asking the most important question: what happens next?
This is where feedback loops become useful. Every action in an economic system produces a reaction. Prices adjust. Competitors respond. Regulators intervene. Consumers change behaviour. The system is never static. When someone presents you with a confident chain of consequences (A leads to B, which leads to C, which means you must do D), the correct response isn't to admire the logic. It's to ask what's missing from the chain.
Almost always, what's missing is the loop back. The part where C changes the conditions that caused A in the first place.
The American trader's analysis wasn't wrong because his individual facts were incorrect. AI may well affect IT revenues. The rupee may weaken further. His analysis was wrong because he treated a self-correcting system as a one-way street.
For retail investors, the practical lesson is straightforward. Whenever you find yourself (or someone else) building a case that runs from a single starting fact to a specific investment conclusion through three or four logical steps, pause. Think critically. The longer and neater the chain of reasoning, the more likely something important has been left out.
Markets aren't dominoes. They're living systems, full of participants who are reading the same news and adjusting their own behaviour in response. The future isn't a straight line extended from the present. It's a series of adjustments and reactions that no chain of logic, however elegant, can fully anticipate.
The best investment decisions aren't built on predicting a sequence of events. They're built on acknowledging that the sequence will inevitably be interrupted.
Also read: The great investor theory
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