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Decision-Making And The 10 Most Common Psychological Biases Of Investing

Tyler Durden's picture




 

Be it BBQ judging, investing, picking out an outfit, or even choosing whether or not you’re going to show up for work tomorrow – ConvergEx's Nick Colas notes that there’s a decision making process occurring.  Quite simply, decision making is the cognitive process resulting in the selection of a final choice among several alternative scenarios.  Final choices can be opinions (as in “This brisket is an 8”) or actions (such as “I will invest in tech stocks”), and decisions are both conscious and unconscious.  For investors, financial decisions and how we tend to arrive at them are of particular importance.  The following is a cautionary tale of the 'Top 10' common biases that creep into the decision making process.  Recognizing and eliminating these biases from your financial choices will make you a sharper and smarter investor... or BBQ judge... or whatever it is that you do.

Via ConvergEx's Nick Colas,
 
Decisions in the financial arena are especially complex and are complicated by a host of outside forces.  As an investor, in particular, you should be aware that you’re subject to biases which occur during the decision making process.  Recognizing and minimizing their importance in your financial choices will make you that much better off and (hopefully) quite a bit richer.

Read on below for our list of the 10 most common biases affecting the psychology of investing.

1) Anchoring & Adjustment:  This combination occurs when initial information unduly influences decisions by shaping the view of subsequent information.  Once the “anchor” or initial information is set, there exists a bias for interpreting other information around the anchor.  Car salesmen frequently use this tactic when presenting an initial sales price, making the subsequent negotiated prices seem lower than the initial price even though they are still higher than what the vehicle is actually worth.

 

2) Attribution Asymmetry:  The concept here involves people’s tendency to attribute success to internal characteristics (such as talent and innate abilities) and to attribute failures to external factors (like simple bad luck).  Research has shown the reverse to be true when evaluating the successes and failures of others.  The lesson here is most valuable when you hit a “hot streak.”  When you experience speed bumps, don’t be quick to write them off as poor luck – there could be a fundamental problem with your strategy.

 

3) Choice-Supportive Bias:  By distorting recollections of chosen courses of action versus the rejected courses of action, people tend to make the chosen outcomes seem more attractive that the foregone ones.  Just as people more frequently remember “good” memories than they do “neutral” or “bad” memories, the belief that “I chose this option therefore it must have be superior” can lead to a false recollection of the ultimate outcome.  Learn from your mistakes – don’t forget them.

 

4) Cognitive Inertia:  This is just psychological speak for the unwillingness to change thought patterns in light of new circumstances.  Quite simply, do your homework and keep up on your investments.  If a company slashes guidance, for example, perhaps you should consider altering your investment accordingly.

 

5) Incremental Decision Making & Escalating Commitment:  These biases occur when people view a decision as a small step within a larger process, rather than as a singular choice.  As a result, this viewpoint perpetuates a series of similar decisions, when perhaps many of those decisions should be evaluated with a fresh mind.

 

6) Group Think:  Grown-up lingo for peer pressure, group think occurs when one feels compelled to adhere to opinions held by a larger group.  This one’s easy – don’t let others sway your opinion.  Groups tend to form a singular opinion based on the opinion of the loudest or most influential person in the group.  Doesn’t mean he’s right.

 

7) Prospect Theory: This theory explains that people are more likely to take on risk when evaluating potential losses; though in looking at potential gains, humans have the tendency to be risk-averse.  In other words, losses feel worse than gains feel good.

 

8) Repetition Bias:  The bias results from the willingness to believe what one has been told most often and by the greatest number of different sources.  Remember all the hoopla over Facebook’s IPO?  And then its year one performance?  Yeah, everybody though it was a hot stock and only now has it drifted above its IPO price.

 

9) Sunk-Cost Fallacy: If someone makes a decision about a current situation, based all or in part on what they have previously invested (money, time or otherwise) in the situation, they are suffering from sunk-cost fallacy.  Not matter how much you’re down on an investment, if it’s likely to never be recovered, then cut your losses and let it go.

 

10) Wishful Thinking: This “problem” happens when people are too optimistic; wanting to see things in a positive light can distort perception and objective thinking.  Just because you really really really want your investment to appreciate, doesn’t mean it will.  Investing should not be treated as gambling.

Decision making may seem an elementary topic – after all most decisions are made unconsciously given that we just don’t have time to sit down and weigh the pros and cons of each choice we make – but when decisions are of the financial nature, it can’t hurt to overanalyze.  Things like “think for yourself” and “see the facts objectively” may seem obvious, but it’s quite amazing how often such basic concepts are forgotten amidst the abundance of investment decision-making literature out there.  Behavioral psychologists have long debated biases in judgment and decision making, and we’ve weeded out the 10 most common.  Simply knowing they exist and being aware they have many victims will give you an edge and a fresh perspective.  Happy investing.

 

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Fri, 10/04/2013 - 13:44 | 4023132 Harbanger
Harbanger's picture

The perception manipulators know this and use it to influence people's decisions.

Fri, 10/04/2013 - 13:52 | 4023162 Pure Evil
Pure Evil's picture

Only have one rule of thumb:

     Buy High and Sell Low and always BTMFD.

Fri, 10/04/2013 - 14:28 | 4023298 ronaldawg
ronaldawg's picture

My rule?

Whatever MDB says, I go in opposite direction.

Fri, 10/04/2013 - 14:56 | 4023371 RafterManFMJ
RafterManFMJ's picture

Investing - I don't think that word means what you think it means.

Fri, 10/04/2013 - 15:24 | 4023499 Say What Again
Say What Again's picture

After 5+ years of market manipulation by the bernank, preceded by the lunacy of Greenspan's Bubbles, I believe no one remembers how to make "decisions" based on fundamental information, or even traditional short term trading signals.

 

Fri, 10/04/2013 - 16:57 | 4023774 halfawake
halfawake's picture

how does this impact my fantasy football teams?

Fri, 10/04/2013 - 13:52 | 4023167 smlbizman
smlbizman's picture

so, should i btfd?...

Fri, 10/04/2013 - 13:58 | 4023190 Pure Evil
Pure Evil's picture

Group think says you should. In fact they insist.

Fri, 10/04/2013 - 13:43 | 4023133 fonzannoon
fonzannoon's picture

ZH=group think.

be honest. it is.

Fri, 10/04/2013 - 13:47 | 4023140 slotmouth
slotmouth's picture

I agree with you completely, whatever you say.

Fri, 10/04/2013 - 13:48 | 4023145 ParkAveFlasher
ParkAveFlasher's picture

+1000 Fonz.  Everyone agree?

Fri, 10/04/2013 - 13:50 | 4023158 fonzannoon
fonzannoon's picture

LOL, boring day, I figured someone would get angry and take a shot at me. Spice up the place...

Fri, 10/04/2013 - 13:52 | 4023171 Pure Evil
Pure Evil's picture

You are correct sir.

Fri, 10/04/2013 - 13:54 | 4023175 ParkAveFlasher
ParkAveFlasher's picture

I think they call this cabin fever ... for doomers.

Fri, 10/04/2013 - 14:06 | 4023197 Pure Evil
Pure Evil's picture

I'm just disappointed there aren't more Wild West D.C. Shootouts today where innocents get slaughtered then get smeared in the MSM the next day while the real crooks go about doing business as usual up on Capital Hill.

Fri, 10/04/2013 - 15:25 | 4023511 Say What Again
Say What Again's picture

I was hoping the emotionally stunted "Hollywood Stuntz" would take a ride down Pennsylvania Ave.

Fri, 10/04/2013 - 14:03 | 4023215 indygo55
indygo55's picture

Gonna need to crash into a gate or something.

 

Fri, 10/04/2013 - 14:58 | 4023385 Seahorse
Seahorse's picture

I'm in.

Fri, 10/04/2013 - 13:49 | 4023150 Clowns on Acid
Clowns on Acid's picture

And Main Stream media is...?

Fri, 10/04/2013 - 13:50 | 4023155 Harbanger
Harbanger's picture

You don't have fight club in a group think setting.

Fri, 10/04/2013 - 13:55 | 4023164 fonzannoon
fonzannoon's picture

fight club left the building 2 years ago. 

(that's not my down arrow)

Fri, 10/04/2013 - 13:56 | 4023185 Dr. Engali
Dr. Engali's picture

If fight club still existed there would be as many red arrows as there are green.

Fri, 10/04/2013 - 17:57 | 4023973 Kirk2NCC1701
Kirk2NCC1701's picture

I just Red-Arrowed you, to restore some balance.

I'd also like to apologize for that, but what kind of a Fight Club would it be?

Fri, 10/04/2013 - 18:27 | 4024066 Dr. Engali
Dr. Engali's picture

From one Trekkie to another. You have one of the best avatars on the site.

Fri, 10/04/2013 - 13:56 | 4023187 Harbanger
Harbanger's picture

I'm disagreeing with groupthink comments here all the time.

Fri, 10/04/2013 - 14:00 | 4023201 Pure Evil
Pure Evil's picture

I'm sorry. I have to disagree with your groupthink disagreeing.

Fri, 10/04/2013 - 14:02 | 4023212 Dr. Engali
Dr. Engali's picture

And I'm sorry that I have to disagree with your disagreeing about his disagreeing with the group think here.

Fri, 10/04/2013 - 14:26 | 4023274 Pure Evil
Pure Evil's picture

I groupthink that we all groupthunk that groupthinking to death.

Fri, 10/04/2013 - 14:03 | 4023218 Harbanger
Harbanger's picture

Convictions of beliefs are not groupthink.  Groupthink is what the average population member accepts as true without question.  Agreement within a niche group is not groupthink.

Fri, 10/04/2013 - 14:13 | 4023250 Pure Evil
Pure Evil's picture

Right on Professor! We all agree in our little niche group.

Thinking of groupthink in niche groupthinks, did you hear the one about.......

Fri, 10/04/2013 - 14:53 | 4023368 kito
kito's picture

Now that Francis is gone, I'm a self hating Jew. I hate the fact that my tribe is taking over the world and stealing all the money and consolidating power to enslave the masses

Fri, 10/04/2013 - 15:26 | 4023508 NoDebt
NoDebt's picture

I don't care who you are, that's funny right there.

Fri, 10/04/2013 - 15:35 | 4023553 kito
kito's picture

We Jews also own the entertainment industry. It's in my blood to be funny.

Fri, 10/04/2013 - 15:50 | 4023608 ParkAveFlasher
ParkAveFlasher's picture

"Self-hating Jew", is that like a "self-cleaning oven"?  RIMSHOT

Fri, 10/04/2013 - 16:02 | 4023640 kito
kito's picture

Oh dang!!!!!

Fri, 10/04/2013 - 17:29 | 4023851 Kirk2NCC1701
Kirk2NCC1701's picture

@kito: "Now that Francis is gone..."

What happened?  Was he booted off, or did he leave?

Fri, 10/04/2013 - 14:02 | 4023207 fonzannoon
fonzannoon's picture

Group think ZH examples:

Stock market about to crash

Gold about to go parabolic as physical gold price separates from paper

Reserve currency status about to be lost

Tesla is flammable

 

Fri, 10/04/2013 - 14:08 | 4023232 Harbanger
Harbanger's picture

All facts based on sound knowledge.  That's not an example of groupthink. 

Fri, 10/04/2013 - 14:27 | 4023296 Pure Evil
Pure Evil's picture

All thinking becomes groupthink as soon as someone agrees with you.

Fri, 10/04/2013 - 14:49 | 4023355 Cognitive Dissonance
Cognitive Dissonance's picture

As a group me, myself and I agree.

<The three amigos are never wrong even when they are.>

Fri, 10/04/2013 - 16:32 | 4023709 BlandJoe24
BlandJoe24's picture

and:

Hyperinflation coming, NOT Deflation

Fri, 10/04/2013 - 20:41 | 4024480 Amagnonx
Amagnonx's picture

Hmmm - I think most would say deflation is inevitable, but afterwrds hyperinflation is increasingly likely.

Fri, 10/04/2013 - 13:51 | 4023168 ParkAveFlasher
ParkAveFlasher's picture

Correct me if I'm, which I'm not, but THAT is group think.

Fri, 10/04/2013 - 13:56 | 4023177 Dr. Engali
Dr. Engali's picture

I hate to say it, but you're 100% spot on. That's why it's important to troll some other sites.

Fri, 10/04/2013 - 13:58 | 4023189 fonzannoon
fonzannoon's picture

I also think that the original Tyler is in Bora Bora spearfishing or just having mai tai's

Fri, 10/04/2013 - 14:00 | 4023206 Dr. Engali
Dr. Engali's picture

Yeah so do I. Mr. Lennin Hendrix and I came to that conclusion some time back. You never see the 50+ word sentences any more. 

Fri, 10/04/2013 - 14:03 | 4023213 fonzannoon
fonzannoon's picture

Mr. Lennon Hendrix was a good dude.

Fri, 10/04/2013 - 14:04 | 4023223 Dr. Engali
Dr. Engali's picture

Yeah he was. I liked his alter ego ...he was pretty funny.

Fri, 10/04/2013 - 14:32 | 4023311 DeadFred
DeadFred's picture

My conjecture is that Tyler 1.0 left shortly after being served with a National Security Letter. A request for the current Tyler would be to let us know if/when ZH is compromised by changing tone, speak as the royal we or something so we know not to feed them inside information. I used to worry they would crack your encryption but I realized all they had to do was serve you with a piece of paper... It make life easier when you don't have to worry anymore.

Fri, 10/04/2013 - 15:12 | 4023451 NaN
NaN's picture

My favorite is: "that's hard to say".

Fri, 10/04/2013 - 14:02 | 4023214 Pure Evil
Pure Evil's picture

How do you know there was an original?

Fri, 10/04/2013 - 14:06 | 4023228 fonzannoon
fonzannoon's picture

I found this place because of this article. They could be wrong.

http://nymag.com/guides/money/2009/59457/

Fri, 10/04/2013 - 14:17 | 4023259 Pure Evil
Pure Evil's picture

Tyler is a a riddle wrapped in a mystery inside an enigma.

Fri, 10/04/2013 - 14:17 | 4023262 fonzannoon
fonzannoon's picture

inside a buffalo chicken wrap

Fri, 10/04/2013 - 14:23 | 4023284 Pure Evil
Pure Evil's picture

Hot and spicey, but not from McDonalds cause I heard they had Morgellons fibers growing out of their Chicken Nuggets.

Fri, 10/04/2013 - 18:49 | 4024117 Kirk2NCC1701
Kirk2NCC1701's picture

+1.  GREAT link, Fonz!.  Thanks.

Fri, 10/04/2013 - 14:06 | 4023231 NoDebt
NoDebt's picture

How the hell did you just pull off all those comments?  That giant stream of blasphemy, above?  I read the first one and cringed at what I thought was coming next.  I figured "OK, this is Fonzie's big goodbye."

I up-arrowed every single comment in the whole damned mess.  Sorry, man, I guess you're stuck here.

Fri, 10/04/2013 - 14:07 | 4023220 CrashisOptimistic
CrashisOptimistic's picture

It's not group think.  It's an echo chamber of the self aware, but it's not a population cross section.

The commenters on ZH are several things:

1) Mostly male

2) Higher than 100 IQ (just given that they type in a world of touch screens and finger swipes)

3) Mostly successful people who have had their success smacked or attenuated in the new normal

You won't get any anger consensus until you attack gold.  Then they will hate you for a while, and then the self awareness kicks in and they will consider the attack rationally, and then their book will drag them to a conclusion that they were right about gold after all and you're hated again.

 

But as for the article, mostly bullshit.  No one gives a fuck about behavioral finance in an equity world dominated by HFT, share buybacks and the Fed, in that order.

 

Fri, 10/04/2013 - 14:14 | 4023255 fonzannoon
fonzannoon's picture

This market is the largest behavioral finance example (being conducted by the fed) in the history of human civilization. 

Fri, 10/04/2013 - 14:47 | 4023346 Oracle 911
Oracle 911's picture

Let me correct You, HFT algos don't have emotions, but they owners have and psychology profile, and yes these 10 points still apply for the large majority, even these times BUT not in the same ways as in the past.

Fri, 10/04/2013 - 14:08 | 4023234 dick cheneys ghost
dick cheneys ghost's picture

fonz..........now that francis_sawyer is banned/gone, I agree

Fri, 10/04/2013 - 14:11 | 4023247 fonzannoon
fonzannoon's picture

FS is gone? Wow. How about Divided States?

(this thread is becoming an accidental mutiny)

Fri, 10/04/2013 - 14:16 | 4023261 Dr. Engali
Dr. Engali's picture

The fact that some good commentators as well as some controversial commentators have left or been banned tells you everything you need to know about what has happened to this once fringe site. 

Fri, 10/04/2013 - 14:23 | 4023266 fonzannoon
fonzannoon's picture

Wow it's left hooks and right crosses now!

Agreed 100% Doc.

who would have thought our first outburst of real fight club in a long time would be directed in this direction? Irony...

Fri, 10/04/2013 - 14:27 | 4023293 Dr. Engali
Dr. Engali's picture

The thing that gets me about the stupidity of banning,,( I thought this was a free speech zone) is that once banned you can be let back in if you would like under another pseudo-name. how many incarnations were there of Slewie-the- Pirate?

Fri, 10/04/2013 - 14:29 | 4023303 fonzannoon
fonzannoon's picture

well in case we find out, keep fonzyfonzanoon@yahoo somewhere. You are a good dude Doc, I'd hate to have a lot of laughs with you on here for years just for both of us to disappear like a fart in the wind.

Fri, 10/04/2013 - 14:35 | 4023318 Dr. Engali
Dr. Engali's picture

Thanks Fonz. Same here. BTW since we are airing our grievances..I don't know about you, but Tyler  selling out disappointed me and pissed me off. If you're going to start a movement to upset the status quo stick with the damn thing.

Fri, 10/04/2013 - 14:39 | 4023323 fonzannoon
fonzannoon's picture

Yep, the yahoo financialization of this place has made me rethink a lot. I had "faith" in this place and it was quite a let down.

Selling out is the worst possible thing one can do.

Fri, 10/04/2013 - 15:39 | 4023563 kito
kito's picture

Anybody up for some Jew bashing?

Fri, 10/04/2013 - 15:45 | 4023580 fonzannoon
Fri, 10/04/2013 - 14:31 | 4023308 NoDebt
NoDebt's picture

Doc- I'll direct your attention to the ads running up and down the left and right margins of your screen.  And the giant page-splattering pop-ups you'll get if you don't have a good blocker.

Fri, 10/04/2013 - 14:28 | 4023301 ronaldawg
ronaldawg's picture

Francis is gone? Why?

Fri, 10/04/2013 - 14:30 | 4023306 fonzannoon
fonzannoon's picture

Take a freaking guess. There was a particular topic he was quite chatty about.

Fri, 10/04/2013 - 15:40 | 4023571 kito
kito's picture

Did you know that we Jews own 600 trillion dollars?

Fri, 10/04/2013 - 17:54 | 4023962 Kirk2NCC1701
Kirk2NCC1701's picture

"I'll be back." -T2000

He'll be back, under a new label.  Unless he wants to get busted right away, he'll have to "reinvent" his blogs, since his writing and CAPITALIZATION style is easy to spot.

Diplomacy:  The fine art of telling people to 'Go to Hell!', w/o getting in trouble for it.

Fri, 10/04/2013 - 14:16 | 4023257 Freddie
Freddie's picture

I bought a boatload of that Tweeter stock so I have that going for me.

http://www.youtube.com/watch?v=pBWcRqPesws

Fri, 10/04/2013 - 17:45 | 4023931 Kirk2NCC1701
Kirk2NCC1701's picture

Of course ZH has its share of "Group-think"!  We also have Cognitive Inertia (stubborn?) and Wishful Thinking.

Not to be overlooked, we also have popularity ratings, sometimes reminiscent of a junior-high school.

Fri, 10/04/2013 - 20:35 | 4024453 Amagnonx
Amagnonx's picture

Everyone who questions the group think, or asks a difficult question gets red arrowed to oblivion - usually they desrve it though.  Still, a bit of controversy on this site wouldnt hurt.

Fri, 10/04/2013 - 13:48 | 4023138 slotmouth
slotmouth's picture

Are these the 10 commandments of the Tesla investor?

Fri, 10/04/2013 - 13:46 | 4023141 toros
toros's picture

What was the question?

Fri, 10/04/2013 - 13:49 | 4023142 zebrasquid
zebrasquid's picture

Follow these guidelines precisely and you'll still get screwed by the market manipulation forces..

Fri, 10/04/2013 - 13:55 | 4023178 Pure Evil
Pure Evil's picture

Step up to the plate, lose your wad of cash, and go home knowing you were bested by the finest co-located HFT algos on the planet.

Fri, 10/04/2013 - 13:51 | 4023166 Oquities
Oquities's picture

decision making for obamacare means lowering your taxable income in exchange for several thousand dollars of health care premium subsidies.  to maximize subsidies, do the following:

avoid interest and dividends

invest for capital gains

delay social security until medicare kicks in

delay retirement plan distributions until medicare

sell rental real estate now if you are going to make big gains

avoid tax free bonds

don't get married

have a big family if you're young and poor - you only pay for 3 kids max on insurance

 

 

Fri, 10/04/2013 - 13:56 | 4023184 kevinearick
kevinearick's picture

Flow: False Assumption Programming

So, we have an empire distribution of false assumptions, a transport membrane of membranes, temporarily protecting legacy capital, passive real estate activity characterized as work product, from individuals doing nothing productive relative to nature, at great cost, to individuals doing make-work at little cost, separated by collective peer pressure false assumptions, belief thresholds, in each social event horizon, moving backwards in time relative to the leading edge of the universe, serving as the ground on our little human battery.

How much a cop, a homeless person, or Henry Kissinger is worth depends upon the chosen medium of transaction, how YOU choose to count. What would HK be worth to you if he came out and admitted that this positive feedback loop between artificial free trade and artificial international tension, which he fueled with massive other-people’s-money pension leverage, to please capital, of which he took a substantial cut, is a complete and colossal waste of time, manpower and goodwill, that the American middle class has simply followed every other empire middle class into the black hole of History? We all fu- up, some much more than others.

If you have produced anything net, which will withstand any time in the midst of this sh-show, you have accomplished more than the vast majority of humans on this planet, which, until recently, embraced the empire race to the bottom. You are the light in the darkness created by capital.

“These guys may threaten to take their mother hostage, but they will never hurt their mother.” Eat more crap because my growing stomach isn’t full, until I go into convulsions, throw up, and start over. That is TARP. Congratulations, the economy is a bioengineered vegetable on life support, and all of its assumptions are proving themselves wrong. Welcome to the party Monsanto peer pressure robots.

Your name, which represents your life’s work in progress, is your brand. Time intelligently invested in production begets wealth, which begets money, or anything else in which you choose to store the value, not the other way around, unless you focus on money to begin and look backwards, to legacy capital interest. You decide what capital’s land and money is worth in the transaction, because capital cannot adapt itself; it is a prisoner, along with all who follow it, to observers prism. Of course it will pay others with inflationary paper to certify the compliance of others.

Doesn’t it seem odd to you that an arbitrary ticket for a California stop, normal rolling through in California, costs you $500, but when you drive through other communities where stopping is the norm, breaking the law costs $50. Empire scale economics is like fishing in a barrel. You don’t want to be an intelligent fish in a barrel of stupid fish, and then compound the error by doing something stupid.

The truth rings for you. The false assumptions you apply are individually irrelevant, so long as they net to eliminate observers prism from your position. You don’t care about development derivates stolen behind you, because they will leave the thieves at a dead end every time, which they always turn into a shooting gallery, until they run out of food. Insert a random constant into the integral.

Store your wealth beyond government, which is no closer to cracking DNA than it is to the universe, because you haven’t told it, and even if you did, it would spend all its time trying to disprove your position and monetizing the process, because the solution is inconsistent with the false assumption of government. Government cannot escape its own gravity, by design.

No economy begins with money. Congress issued money on the assumption of fertility, which it then stole with the assistance of a middle class built for the purpose, ‘thinking’ that it learned from previous empire iterations, but falling further behind nevertheless. Whether you feed an empire is always a choice. Anyone with a brain cell knows that consumers have to be fired and producers hired, so consumers can be hired again. As a producer, your value always increases, whether the empire accounting system recognizes the fact or not.

In the begin, you cannot expect newly formed capital to reward behavior to replace capital. After several generational iterations, you may expect the progeny to punish behavior that replaces capital, work, in an increasingly arbitrary, capricious and malicious manner. It’s not a conspiracy, good or evil, from a programmer’s perspective. It’s just stupid being stupid, multiplication.

If you are going to go into one of those barrels, you might want to appear to be as same as the other fish, travel randomly among the barrels relative to the empire, and spend no more than the time necessary in the barrels. Don’t make the problem solution more difficult than it is. What is the difference between lead and gold; how do you mirror a distribution, until you don’t, load the spring, drop the load and trigger the catapult?

Ever study naval instrumentation, its effect on navigation and power, leading up to America? Build your own measuring instrument. The answer to the question of which way electricity flows is both, but you can’t measure it with archaic empire instruments. You may not want to give capital your prototype; in fact, you may want to let it steal your second derivative.

Ever notice those kids that appear impervious to the empire around them, how they get just what they need when the need it, out of nowhere, and those nasty little bullies that are rewarded to grow a gang to hunt them down? They aren’t accidents.

It’s an algebraic catapult, a process of addition and subtraction. Capital is subtraction by addition. Labor is addition by subtraction, through geometry. And the middle class chases symptoms. The spiritual train is always at the station for those with eyes to see it for themselves. The physical train created by the railroad is always going over the cliff.

Fri, 10/04/2013 - 15:26 | 4023513 NaN
NaN's picture

Good rant, salted with nonsense to keep people on their toes.

Fri, 10/04/2013 - 20:29 | 4024437 Amagnonx
Amagnonx's picture

High quality nonesense salted with rant imo.

Fri, 10/04/2013 - 16:44 | 4023745 StandardDeviant
StandardDeviant's picture

Jeebus.  Was that software?  Or a miscalculated dosage?

Fri, 10/04/2013 - 14:12 | 4023252 Dr. Engali
Dr. Engali's picture

This whole article is worthless in a centrally planned market place. Just BTFD is all you need to know.

Fri, 10/04/2013 - 14:23 | 4023283 edifice
edifice's picture

Yes, this.  And, hold your longs for a week, to get around HFT.

Fri, 10/04/2013 - 14:19 | 4023265 franciscopendergrass
franciscopendergrass's picture

Completely off topic.  how come ZH never had an article on the tax increase by Japan?  Tyler has no opinion on this?  Has Tyler been paid off by the Japanese ruling elite?  http://www.bloomberg.com/news/2013-10-01/abe-proceeds-with-japan-s-first-sales-tax-increase-since-1997.html

 

Fri, 10/04/2013 - 14:21 | 4023276 Save_America1st
Save_America1st's picture

Answer:  What to read BEFORE you buy 50,000 shares of TWTRQ

Fri, 10/04/2013 - 14:22 | 4023278 daemon
daemon's picture

Interesting.

But frankly, whatever your biases are, it's almost completely irrelevant, because the name of the game is: "head they win, tail you lose".

 

Fri, 10/04/2013 - 14:49 | 4023353 RougeUnderwriter
RougeUnderwriter's picture

Do what the Squid does - not what the Squid says

Fri, 10/04/2013 - 15:24 | 4023507 involuntarilybirthed
involuntarilybirthed's picture

I'd rather loose money than try to understand all that.  Makes my head hurt.

Fri, 10/04/2013 - 15:35 | 4023543 Itch
Itch's picture

Summarized in a few words...humans are plainly bonkers. I have grappled with behavioural finance for a while now, not just the subject, but with the general implied idea regarding its premise, i.e. that if we know enough about our behaviours we will somehow be conscious enough to prevent our worst excesses. Trying to outsmart personal stupidity more or less; if i could outsmart my stupidity, i probably wouldn't be trading.

Its an attractive proposition, it takes the meaning of "know thy self" to another level...but while it might explain to economists by way of theory, how humans really behave contrary to the current model, trying to apply the theory to the self in a "self-help" fashion is a different animal.

Even the simple philosophical subtlety required to to parse the act of investing from the act gambling, can disappear in the heat of the moment, aka when you are rather worried(i can hardly count sometimes when there is risk on the table). Im not going to try and formulate a treatise on my behaviour when shit is running down my leg. You might say, "then dont let the moment get heated"...in that case, i would be a librarian. 

Knowing that you are falling apart, and being able to explain it with a myriad of profound intellectual theories, wont stop you falling apart, its only going to make the process of falling apart very confusing. You are falling apart in the first place because of limited human capacity and experience, and because the risk (existential risk if you are trading for a living) is sapping your vitality. This is true for all strategy games where there are resources on the table. 

Champion chess players dont (cant) think themselves into better chess players in the middle of a game. They draw on innate capacity to read and speculate about the development of the match. And after years of practice, its either there, or its not. It comes down to the old saying, "to know and not to do, is not to know".

Trying to detach yourself from the risk intellectually, is just another way of denying it. One needs a concrete framework for reference going forward if any progress is to be made, not some convoluted body of highbrow work that's constantly shifting and arguing with itself. That reference point can only be found on a personal level, thats why i prefer managerial biographies to listening to boffin s telling me how smart i could be, if i only outsmarted my own stupidity.

 

Fri, 10/04/2013 - 17:03 | 4023794 StandardDeviant
StandardDeviant's picture

I'm surprised that we're already this far into the thread without anyone mentioning it, but the author really should have given credit where it's due: that is, to Daniel Kahneman, the father of behavioural psychology.  His latest book, Thinking, Fast and Slow, goes into great depth about these biases and many more.

He also addresses an important point made by Itch: that even knowing I am prone to a particular type of bias or fallacy doesn't mean I'll always be able to avoid it, or even to realize that I'm falling into the same trap.  Kahneman himself, for all his decades of research and study on the subject, admits that he catches himself doing this all the time.

That doesn't mean it's hopeless, though.  At the end of each chapter describing a particular cognitive bias, he give examples of the kinds of situations in which that one might affect us, and what we might say to ourselves in order to avoid the trap.  (Sadly, I don't have the book at hand, so I can't give a good example.)

It's definitely not light reading, but well worth the effort -- especially if it saves you from even one big mistake.

Fri, 10/04/2013 - 19:09 | 4024179 SHRAGS
SHRAGS's picture

+1, Thinking Fast and Slow, as well as Taleb's trilogy Fooled by Randomness, Black Swan & Antifragile which covers similar terrain.

The only blemish to Kahneman's book is its glowing coverage of Cass Sunstein...

Fri, 10/04/2013 - 16:56 | 4023713 Hongcha
Hongcha's picture

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