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A Behind The Scenes Glimpse Into The Magic Of The Market
While the discipline of behavioral finance is relatively new, the performing art of magic has long exploited many of the same principles about human nature and decision-making. While much is made of the smoke-and-mirrors market we exist in, Nic Colas, of ConvergEx Group, reviews the 'Basics' of this ancient form of entertainment, courtesy of a recent Smithsonian magazine article by Teller (the quiet half of Penn & Teller), and draws some analogies to the modern world of investing and economic analysis. The crossover points include pattern recognition, overconfidence, and the illusion of free choice. Nothing in my hands, nothing up my sleeves…
The Magic Of The Markets
One of the few Christmas presents I distinctly remember from my youth was an amateur magic set, given to me by my favorite uncle. It had all the staples, from a “fixed” deck of cards to top hat with a fake bottom to a magic wand. At the tender age of eight, however, I rapidly discovered that I was a tremendously lousy magician. I enjoyed explaining the structure of the tricks to my audience far more than keeping the necessary aura of secrecy. This flaw in my personality, my uncle assured me, would get me drummed out of the business, and sooner rather than later.
I had a flashback to that internal conflict as I read a newly published article by Teller, the quiet half of the Penn & Teller stage act, online in Smithsonian magazine. In the piece, he outlines seven principles of magic and reveals the secret behind one of his tricks, a seemingly simple card stunt that actually has quite a few components.
Magic as entertainment exploits many of the same human foibles that make investing and economic analysis so difficult. Everyone in the crowd at a show sees the same thing – what the magician wants them to see – but the outcome is still unexpected. And seemingly magical. We all know there must be a “Trick,” but everything goes by so fast that we simply miss it. Understanding the movement of asset prices or the impact of economic policy is much the same, I think. When you look at a stock price chart, for example, and review how a given equity has performed, the “Trick” that explains why the company did well (or poorly) is usually obvious. But at the time, it likely seemed more like magic.
Teller’s list of some of the essential characteristics of a magician’s craft reads like a cautionary tale to investors. Here are his points, with a little of my own interpretation of how they apply to better understanding economic analysis and capital markets behavior. His list is represented, verbatim, in bold. Everything else is my own interpretation unless otherwise stated.
#1 - Exploit pattern recognition.
There is a reason why magicians use playing cards in so many tricks. We all know the number of cards in a deck, the numbers and face cards involved, and so forth. So when something unexpected occurs, it seems surprising because we thought knew the pattern (52 cards, 4 suits, etc) and understood the odds of say, the magician guessing “Our card” from the seemingly random collection at hand.
How many times have your heard “This company has a razor/razor blade business model?” Or, “The stock market usually rallies in the fourth year of a presidential election cycle?” Humans are simply desperate for patterns to emerge in their lives. With so much going on, life would be a lot simpler if events could follow some repeatable form. So we look for them, even in complex environments such as global business model analysis or capital markets pricing behavior. And we are as surprised as when we’ve seen a great magic act when they don’t follow our preconceived notions of a repeatable pattern.
#2 - Make the secret a lot more trouble than the trick seems worth.
In the Smithsonian article Teller relays a story of how he and Penn pulled 500 roaches out of a hat on the Letterman show. The stunt took months to prepare and less than a minute to pull off. The illusion was successful because the audience could likely imagine that the trick was “Doable,” but who would spend the clearly inordinately large amount of time perfecting something that would pass so quickly? And with roaches? Yikes!
I think great stock research strongly resembles the roach trick – you need to put in a huge amount of effort to get a small amount of useful, actionable, and legally obtained information. This has only gotten more difficult with the advent of Internet in the 15 years, since all the easy material is out there for everyone to see. It might take a legion of rocket scientists, or a cadre of mall walkers, or a survey of thousands of consumers. Real investment “Edge” takes a huge amount of effort.
#3 - It’s hard to think critically if you’re laughing.
Humans have a tough time with critical reasoning if they are distracted. Humor is a great way to turn off the reasoning mind of 500 people staring at a magician.
The analog in investing is obvious, since any emotion in the enemy of rational thinking. Doesn’t matter if you are fearful, overconfident, or somewhere in between. You aren’t thinking critically.
#4 - Keep the trickery outside the frame.
It is human nature to watch anything that is moving quickly, a fact that magicians use to great effect. The toss of a coat over a chair, a loud noise, the silly antics of a partner on stage – all serve to redirect the audience’s attention away from the real action.
Most of us spend a lot of our day considering the news headlines of the market, and that is misdirection, pure and simple. Take, for example, the national unemployment rate, which has been trending downward in recent months. What if the headline crossing the tape on the next Jobs Report Friday read “Even fewer able bodied Americans interested in working… Unemployment Rate drops further.” You might not feel so good about that news, and yet the labor force participation rate is just an important a component to the well-being of the U.S. economy as the unemployment rate.
#5 - Combine at least two tricks.
Teller spent 18 months (an great example of Rule #2) perfecting a short routine where a bouncing ball appears to jump through a hoop at his command, after first doing other tricks. The hoop jump is meant to confirm the first illusion – that anyone can command an inanimate object.
Monetary policymakers in both the U.S. and Europe have clearly mastered this rule. In a crisis, they know to launch several initiatives at once. Creating money out of thin air (or, really, bits and bytes on a computer) is a neat trick, of course. But then directing that capital to the banking system, bond markets, distressed financial institutions and other locations serves to make the illusion of liquidity even more powerful to the audience of the markets.
#6 - Nothing fools better than the lie you tell yourself.
Good magicians let you notice various aspects of their act on your own. You get to inspect a pack or cards, or see that a box appears to be empty. You believe it because of what you convince yourself you have seen. Once that belief is solidly lodged in your brain, the subsequent parts of the trick appear magical.
The role of artificially low interest rates on equity valuations is one example of this rule of magic at play in global stock markets. Since the Capital Asset Pricing Model uses the risk free rate on government bonds at the bedrock of stock valuations, a share of a profitable business should be worth more as interest rates drop. It is harder, however, to accurately factor the “real” level of interest rates when central banks are pushing them lower so convincingly. And you have to factor in the notion of “Risk free” into the equation as well, since the growth of sovereign debt in recent years makes that assumption harder to accept.
#7 - If you are given a choice, you think you have acted freely.
Magicians will tell you to “Pick a card, any card.” As a result you feel some level of control – since you picked randomly, your choice must have come from a random deck. As Teller succinctly puts it in his article: “Choice is not freedom.”
Market participants have noticed this fact with the recent – and pernicious – high correlations between previously unlinked asset classes. While this force towards common outcomes has weakened in the last few months, investors are now on the hunt for new “Asset classes” that appear to act differently than existing ones. They are searching for new choices that might allow for real freedom rather than the illusion of choice.
Rounding out this brief discussion, it seems to me that investors can benefit from reminding themselves that their own powers of perception are severely limited. If we can be regularly fooled by a Las Vegas magic act, then many of the same flaws in our thinking must be at play when we watch the screens at work. We seek out patterns that don’t really exist. We confuse choice with freedom. We grow emotional and limit our ability to process information. Watching a show, this is amusing. Making investment decisions, not so much.
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Brilliant and sinister are a treacherous pairing.
Teller's smart...I have arguments with Murkins all the time who think that all these false choices we have equate to freedom. We're not free just because we can select from 500 channels (of garbage) or pick between 2 candidates from effectively the same party.
NeObama's rhetoric notwithstanding, he presented such an appealing false choice precisely because he didn't look the same as the typical menu fare.
If you step back and take a look with a detached eye, you can see that the USA is no longer particularly free at all; there is some kind of iron rule on everything. Don't smoke here, don't speed there, don't ingest this. It's a nanny state. You are free to move around inside the metal tube but only when the captain turns off the seatbelt sign and only in approved areas. DO NOT approach the edges of the envelope.
There are any number of analogies; a rat in a cage is free to move around within the confines of the cage. Our cages are continuing to shrink.
So true:
http://www.cabinetmagazine.org/issues/42/wiles.php
(No, it's not Smashing Pumpkins)
Damn Trav, I agree with you again - that's scary!
Pretty much all these rules that apply to magic and investing also apply to politics.
Perception is what it is, power and control are what this is all about. Same as it ever was. Wake me when the jubilee starts.
LawsofPhysics
Same as it ever was.
``All wonder,'' said Samuel Johnson, ``is the effect of novelty on ignorance.'' Yet we are so created that without something to wonder at we should find life scarcely worth living. That fact does not make ignorance bliss, or make it ``folly to be wise.'' For the wisest man never gets beyond the reach of novelty, nor can ever make it his boast that there is nothing he is ignorant of; on the contrary, the wiser he becomes the more clearly he sees how much there is of which he remains
in ignorance. --Harry Houdini
OT
I just want ZHers to know that I just voted for Ron Paul while wearing my Zero Hedge hat.
Welcome to the revolution!
congratulations. your vote was just deleted. carry on.
http://www.prisonplanet.com/ron-paul-is-being-cheated-out-of-the-republican-nomination.html
Have you seen the latest poll?
According to a just released Rasmussenpoll, Ron Paul beats Barack Obama in a head-to-head match-up.
They're quite evenly matched when you think about it.
One of them has a message that can bring real hope and change to America, and the other is really good looking and has an excellent speaking voice.
then RP should run as an independent and should be expected to LOSE because the Democraps and Repugnicons are the ones who combine to count votes in a BIpartisan manner. Note that I did not say TRIpartisan.
The system makes an institutionalized false dilemma for the morons.
and when you say shit like that...
I just want to kiss you on the mouth!
Please never change!
Trav's on a roll today, don't distract him.
Teller also makes this point
"When I cut the cards, I let you glimpse a few different faces. You conclude the deck contains 52 different cards (No. 1—Pattern recognition). You think you’ve made a choice, just as when you choose between two candidates preselected by entrenched political parties (No. 7—Choice is not freedom)."
'If you are given a choice, you think you have acted freely.'
American idea of 'freedom' summarized.
Cloward-Piven:
http://www.infowars.com/obama-the-cloward-piven-strategy-and-the-new-world-order/
All choice is 2-dimensional (i.e. "left/right", "up/down") as "depth" gets "shallow-ed", and imagination is "hollow-ed" (i.e. "cored" from the periphery).
Our esteemed Non-Federal Reserveless Bank is helping make trillions upon trillions of federal reserve notes disappear (will someone in the audience volunteer to check behind Jamie Dimon's ear?) .
Sure, they will claim that those notes are still showing as existing as a ledger entry (based on some alchemist/unicorn valuation formula for these extremely 'high quality' assets in Maiden Lane I-XXXXXXXVIII & their vast large holdings of high yield treasury notes), but that's part of the ongoing illusion that will soon be revealed (I don't want to ruin the surprise).
The Bernank's Big Magic Spectacular.
Abracadabra, bitchez.
TruthInSunshine said:
"Our esteemed Non-Federal Reserveless Bank is helping make trillions upon trillions of federal reserve notes disappear"
Petition the Whitehouse...lol!
good luck with that...
btw: "A whitehouse.gov account is required to sign Petitions."
or?
you cna sign up here and they will forward the info to the White House..
and if you hate what is available to sign..
then you can make your own petition to sign!
so?
more dancing wiff da starz is it?
http://www.care2.com/ <---- this is where the rubber meets the road! (for those that believe talking or marching or painting Picket signs will help remove the Powers that Be, LULZ)
People after trying the truth a few times will realize it takes more work to move the sheep that originally thought!
You have to tell them what they want to hear (or see as the case may be) and then motivate them to push a button!
that’s it! sign in once and then click "A" or (1) one Button there after!
How hard can it be to educate, entertain and motivate all at the same time!
If you are so much better than Washington and a semi Professional Writer? it should be well within your skill set to achieve a broader understanding to those who are at least a quarter (25%) of the way interested enough to sign up for this web site in the first place.. right?
You will have a LOT! More respect for Tyler and or the Rockefellers at the end of the Journey should you happen upon or are able to barrow a set of balls and backbone.
Moving the Sheepish Crowd is easier to arm chair quarterback that actually do.
and for the Record..
I do sign some petitions that I think are worthwhile..
I do Protest, March and / or Paint (KINKO's) Picket Signs!
I want too believe that "We the People" can overcome evil thru the use of ONLY! Good in Our Hearts!
I am a Romantic I guess deep down! I want to believe that "We the People" can! be Right! be Just! and Help Each Other to Over Come the Evil (or Greedy Ignorance) that has Gutted America’s Manufacturing Base and Constitutional Rights.. with the use of our Votes!
I want to believe that "We the People" can Over Come the Wrong with Truth and Love!
I Pray for it!
I Beg for it!
I do my Best t Help Educate People so that it may happen!
But in the End, if Push Comes to Shove.. I am willing to Fight for it!
But let me be crystal clear! I would Love Nothing More than America voting people into power.. that are more concerned with the Quality of Life for those in the Country.. than the De-Population of the Country.
and for al of you out there who just tuned out because things like that don’t happen in America Government! I would remind you of a few sourced and sited facts below.
This Train Wreck is on Purpose! This was not only allowed to happen.. but encouraged to happen!
and every day more and more information is put into heavy rotation that can only upset the Herd.
The Powers That Be are pushing for a stampede! Mayhem!! And Worse!!! Every Day! In Heavy Rotation!!
Bill Gates De-Population
http://www.youtube.com/watch?v=-hLZsjv9E-s
http://www.youtube.com/watch?v=U_Gi6cf-jiI
Daddy Rockefeller De-Population
http://www.youtube.com/watch?v=bI0fnRbhHFo
Sen Rockefeller: Let's Depopulate
http://www.youtube.com/watch?v=C3t8BC8XyTg
Eugenics in America (Government Forced Sterilization)
http://www.youtube.com/watch?v=IaH0Ws8RtSc
Congressman Joseph R Pitts Exposes Eugenics Program on House Floor
http://www.youtube.com/watch?v=FDwQNfEFHd4
So, ALL! of this New Information in Heavy Rotation that does NOTHING but upset the Herd / Masses.. that pushes “We the People” ever closer to the edge.. is Provided by Corporate Owned Media Outlets!
How much Proof or information do you need to comprehend that Corporate America has tapped you out! And the Baby Boomers that Corporate America does NOT! want to pick up the tab for! Are the some of the first that will go!
In times of true social unrest the Old and Weak are weeded out!
How much energy can be saved by getting rid of 1 American? The same as getting rid of 5 3rd world persons. We Rich Americans use 5 Times more energy that a person in the 3rd world.
Here are some numbers for you on the thought.. to help you string enough of the facts together for it to stick in your ADD / ADHD Caffeined Out Head!
http://www.youtube.com/watch?v=O5Xe_ATNWQQ
I will skip sustainability!
http://www.youtube.com/watch?v=TzEEgtOFFlM
They responded to the one about finding out if the president of the MPAA/RIAA's statment about congressmen not giving him what he was bribing them for with "We're not goint to respond to this pettition becasue it requests a law enforcement act". So, the executive branch doesn't do law enforcement? For admitted bribery, even? At least now they admit it in public.
Ben and Timmy gonna retire and start a Vegas magic act?
Another Teller missive
Date: Wed, 18 Oct 1995 3:40:27 -0500 (CDT)
From: "Teller"
Subject: Fury
To: "Brian Allen Brushwood"
My dear bastard son,
It is about time you wrote, my boy.
Now, calm down. Remind yourself of a few things.
I am 47. I have been earning my living in show business for twenty years. I have been doing magic since I was five, which makes it 42 years. And I had the good fortune to (a) meet Penn and (b) become an off-Broadway hit at the exact right moment in time.
When we started we HAD no style, no understanding of ourselves or what we were doing. We had feelings, vague ones, a sense of what we liked, maybe, but no unified point of view, not even a real way to express our partnership. We fought constantly and expected to break up every other week. But we did have a few things, things I think you might profit from knowing:
We loved what we did. More than anything. More than sex. Absolutely.
We always felt as if every show was the most important thing in the world, but knew if we bombed, we'd live.
We did not start as friends, but as people who respected and admired each other. Crucial, absolutely crucial for a partnership. As soon as we could afford it, we ceased sharing lodgings. Equally crucial.
We made a solemn vow not to take any job outside of show business. We
borrowed money from parents and friends, rather than take that lethal job waiting tables. This forced us to take any job offered to us. Anything. We once did a show in the middle of the Benjamin Franklin Parkway in Philadelphia as part of a fashion show on a hot July night while all around our stage, a race-riot was fully underway. That's how serious we were about our vow.
Get on stage. A lot. Try stuff. Make your best stab and keep stabbing. If it's there in your heart, it will eventually find its way out. Or you will give up and have a prudent, contented life doing something else.
Penn sees things differently from the way I do. But I really feel as if the things we create together are not things we devised, but things we discovered, as if, in some sense, they were always there in us, waiting to be revealed, like the figure of Mercury waiting in a rough lump of marble.
Have heroes outside of magic. Mine are Hitchcock, Poe, Sophocles, Shakespeare, and Bach. You're welcome to borrow them, but you must learn to love them yourself for your own reasons. Then they'll push you in the right direction.
Here's a compositional secret. It's so obvious and simple, you'll say to yourself, "This man is bullshitting me." I am not. This is one of the most fundamental things in all theatrical movie composition and yet magicians know nothing of it. Ready?
Surprise me.
That's it. Place 2 and 2 right in front of my nose, but make me think I'm seeing 5. Then reveal the truth, 4!, and surprise me.
Now, don't underestimate me, like the rest of the magicians of the world. Don't fool yourself into thinking that I've never seen a set of linking rings before and I'll be oh-so-stunned because you can "link" them. Bullshit.
Here's how surprise works. While holding my attention, you withold basic plot information. Feed it to me little by little. Make me try and figure out what's going on. Tease me in one direction. Throw in a false ending. Then turn it around and flip me over.
I do the old Needle trick. I get a guy up on stage, who examines the needles. I swallow them. He searches my mouth. They're gone. I dismiss him and he leaves the stage. The audience thinks the trick is over. Then I take out the thread. "Haha! Floss!" they exclaim. I eat the floss. Then the wise ones start saying, "Not floss, thread. Thread. Needles. Needles and thread. Ohmygod he's going to thread the need..." And by that time they're out and sparkling in the sunshine.
Read Rouald Dahl. Watch the old Alfred Hitchcock episodes. Surprise. Withold information. Make them say, "What the hell's he up to? Where's this going to go?" and don't give them a clue where it's going. And when it finally gets there, let it land. An ending.
It took me eight years (are you listening?) EIGHT YEARS to come up with a way of delivering the Miser's Dream that had surprises and and ENDING.
Love something besides magic, in the arts. Get inspired by a particular poet, film-maker, sculptor, composer. You will never be the first Brian Allen Brushwood of magic if you want to be Penn & Teller. But if you want to be, say, the Salvador Dali of magic, we'll THERE'S an opening.
I should be a film editor. I'm a magician. And if I'm good, it's because I should be a film editor. Bach should have written opera or plays. But instead, he worked in eighteenth-century counterpoint. That's why his counterpoints have so much more point than other contrapuntalists. They have passion and plot. Shakespeare, on the other hand, should have been a musician, writing counterpoint. That's why his plays stand out from the others through their plot and music.
I'm tired now. I've been writing to you, my dear bastard son, for 45 minutes merely because, tonight, I'm remembering that evening I first met your mother in Rio, during Carnival...ah!...and how we loved!
paternally,
TELLER
Ha. That was cool. Thanks for sharing.
I googled this and found the story behind why Teller wrote the letter. Interesting stuff.
http://shwood.squarespace.com/news/2009/9/21/14-years-ago-the-day-teller...
Better:
http://www.liveleak.com/view?i=416_1218124584
this show always ends the same...
Pattern recognition...what pattern? This market is like waiting for the blue desert sky to start raining. You have to cry to get any water out here.
Dave Corzine should write the next magic article. He can tell everyone how he made 1.2 billion disappear from clients accounts and into his pockets. He didn't even need a magic wand.
He's already gotten a name change.
Some magician, he is!
Dave is Jon's pen name.
and $400,000,000 more vaporized.So far $1.6 billion gone.
The biggest illusion of them all however is "free will." a magician can still "make it happen." the idea...and I have been personally reminded of this everyday going on 18 months now...is that "you have a choice to begin with." You DO NOT. "my country right or wrong. My country will be strong."
Looking at charts it appears as if the markets started going apeshit to crazy levels right about the time I graduated HS in 1988. Curiously....what have these fuckheads been up to since then? LOL. It appears the madness started 25 years or so ago. Who knows. As of now these markets are under complete control. I don't think it can continue but im no expert either. Of course many experts are looking so expertish today either.
This is odd:
Probe finds Japan withheld risks of nuke disaster(AP) Investigation finds Japan withheld dangers of nuclear disaster from own people, UShttp://finance.yahoo.com/news/probe-finds-japan-withheld-risks-100906992...
Americans are a bunch of Ostriches with their heads in the sand......and they wont know until it is too late who is fucking them up their ass.
I've been trying to figure out why the rest of the world isn't rising up against the banker tyrrany... it was the report yesterday that most european countries are still in the midst of their housing bubbles. It seems everyone has their head in the sand and the whole world is about to be ass fucked. Thank god I have my golden chastity belt.
And the market is beating 2008 highs but flat since....
And the market is beating 2008 highs but well below xxxx highs...we of course left this out because....
This is not the market you are looking for....
Wizard of of the Fed: Pay no attention the Bernanke behind the curtain!
this is not: BULLSHIT!TM
nicColas misunderstands teller completely here, if laughter is not "an emotion" like fear or overconfidence; pretty funny, really! Hahahaha!
#3 - It’s hard to think critically if you’re laughing.
#2 - Make the secret a lot more trouble than the trick seems worth.
Watch me pull a chart out of my ass. The chart proves that the market stinks.
Trick secret: I swallowed the chart yesterday with some fava beans and a nice chianti.
I enjoy the ironic twist of their names: Penn "tells" the stories and Teller quietly "pens" them.
Side note: Penn is my favorite odds-on-favorite to win Celebrity Apprentice.
Game: This is my example of distraction employed on each of us every day where choice (leading with a fact then choosing a false hero to win a pretend game) is an illusion.
tis a horrible realization to be reminded we are all aboard a ship of fools. i was/am happy in my self created delusions.
Those listening to the market pundits all share one thing in common: a willing suspension of disbelief.