Daily Speculations

The Web Site of Victor Niederhoffer & Laurel Kenner

Dedicated to the scientific method, free markets, deflating ballyhoo, creating value, and laughter;  a forum for us to use our meager abilities to make the world of specinvestments a better place.

 

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7/8/04
James Sogi: Dr. Patterson

Like BF Skinner, Dr. Patterson is a Behaviorist and believes that one's actions, life, and psyche are the result of operant conditioning, and that the cognitive ephemera were not significant or determinative. In Skinner's famous experiment recreated by every Psych 101 class, rats are put in a box and learn to tap the bar to get food. In a second experiment, the food is dispensed at random. The rats start "superstitious" behavior. They mimic their actions at the time the food came out. For example spinning in circles. They continued the superstitious behavior repetitively, despite the fact that the food was being dispensed at random. His studies of aberrant teens showed that their behavior was not caused by father figures or oedipal complexes, but rather the result of operant reinforcers present in their environment each day. Teams would count various behaviors, analyze them statistically, and discover what caused the problem. The experimenters discovered some powerful results. Trained behavior will persist, despite punishment and lack of reward. Rats would accepting shocks when continue to press the bar to get food after the food stopped. Behavior trained in a variable reinforcement schedule was harder to "untrain" and the rats would accept large shocks yet continue to press the bar long after the food was stopped. This produced erratic behavior. I have always wanted to work with Dr. Patterson on trader behavior. I think he would be able to offer some very interesting insights into traders' behavioral patterns. He believed that the operant conditioning rather than cognitive functions control behavior. If cognitive functions were in control, one could change behavior instantly, but experience shows that behavior does not change over night despite the best intentions.

The behavior of traders is conditioned by the variable rewards and punishments of the market. As Vic has shown, much of market action is random. We can see superstitious behavior among traders in the myths and ballyhoo we debunk here on the list. At times I have to fight the operant conditioning the market gives me. For a while I had a successful rapid trade that worked well. I got conditioned to use that style and was rewarded. But the cycle and rules changed, but I continued the style, unsuccessfully, despite the punishment, until I unlearned the behavior and learned a different much less frequent approach, with better reward. It was tough to unlearn. We have heard stories of trades that continued unproductive behaviors and their resulting losses. When the cycle changed, their behavior continued, due to operant conditioning, despite the punishment and lack of reward. There are strong operant conditioning effects everywhere in life, but appear especially strong in the market. Application of the statistical analysis of trading behavior may lead to great insights in trading and thus to creating those behaviors that produce profits, and avoiding behavior that produce loss.

7/8/04
Comment by Victor Niederhoffer

Where is Dr. Brett when one needs his counseling, as the market seems to have a fixation on the father?  And the father is Greenspan or Yahoo and when these disappoint him, one cries out in pain and seeks solace by withdrawal and the 88 stages of depression (the last being no romance), and then new entities, more virile , more filled with Viagra are ready to take the lead. Only the Dr. can put this in perspective of Simonton , Freud, and then test it with the advance decline line et al.

7/8/04
Comment by Dr. Brett

"We have heard stories of trades that continued unproductive behaviors and their resulting losses. When the cycle changed, their behavior continued, due to operant conditioning, despite the punishment and lack of reward. There are strong operant conditioning effects everywhere in life, but appear especially strong in the market."

We are hard-wired to process most deeply those experiences that are most emotionally charged. (Traumatic stress--which is essentially one-trial learning in operant terms--is a case in point). If you ask yourself which market experiences you process most emotionally, losses vs gains, and what kind of internal dialogue you engage in when you're at your most emotional, you'll see why it is so difficult to succeed at trading.

7/8/04
Comment by Vincent C. Fulco

Dr. Brett (and Specs)-

Is it safe to say that processing the experience and the internal dialogue when trading is made dramatically more complex by all the "layers of fear" one must quiet or dispel??...I.E. 1) fear of loss, 2) fear of blowing up completely, 3) fear of looking stupid to customers, risk managers, fellow port managers within the same firm, 4) fear of losing one's year and having to face a clawback type feature in the upcoming year (or loss of staff due to lack of bonuses) etc, etc. I can think of 2 or 3 occasions within my old firm when the risk manager came down on P.M.'s to cut exposure and re-explain their strategies with individual positions and, of course, within 2 weeks to a month, the strategies would have been quite profitable.

Seems the brave times that I in concert with others have stepped up our exposure at the right time, the career risk for one, was especially high; thinking Oct 2002 and Jan-Mar 2003...equity valuations on many solid franchises were at historically cheap levels and the bad news was pervasive through the markets...It wasn't even a turn in the news flow that mattered, simply a drying up of the bad news or price action which seemed to absorb most of the bad news...An old portfolio manager said to me once, "You don't buy when the guy next to you is puking in his garbage can, you buy when you are puking in your can..."

It is the behavior completely counter to human nature which is so hard to internalize but damn, it feels good when you do...

7/8/04
Comment by Janice Dorn, an Obstetrician and Silver Lover

Realizing that mother Yahoo was close to abandoning them, the children rallied to support her as evidenced by the huge volume. Mother is about to be removed from life support and the children are relieved and rejoicing. They are clinging to mommie, as daddy is at risk for demise/senility.