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12/01/2005
The Frustration Aggression Hypothesis, by Victor Niederhoffer and Alex Castaldo

Neal Miller states a famous and influential theory of behavior from the 1930s as follows: "Wherever there is aggression, one presupposes the existence of frustration, and frustration always leads to some form of aggression."  The theory has been applied to explain every form of behavior that harms others ranging from chicks to humans. For example, chicks not allowed to peck bite their neighbors when freed, and a little brother allowed to play with a doll that his mother takes away from him will smash the doll to pieces. Anthropologists apply this theory to explain the behavior of primitive tribes that accept pain as an inducement to achieving some goal. As Bateson (the Palindrome's second favorite philosopher) puts it, "The thesis fits the Latmul perfectly. But they have added one wrinkle. They have invested aggression with pleasure. For the Latmul, aggressions must be regarded as a self rewarding action series, self reinforcing regardless of whether it ends in injury to some other persons."

The theory is often used to explain violence, with hard economic times leading to the frustration of not having goods that others have, and the constant observation of those with more goods, leading to such aggressions as murder and revolution. The case of the voter who backs the losing candidate or the athlete who doesn't win the very important game is often used as a archetypical case of frustration that we find in normal people. Psychoanalysts use it to explain dysfunctional behavior with the frustration that occurs when some normal behavior has not been allowed, leading to displaced and dysfunctional activities of all sort. A typical case is the daughter who doesn't receive enough oral stimulation from her parents becoming a great and highly sensitive writer. I think that some of the great women writers like Emily Dickinson developed their inordinate sensitivity from such childhoods.

Like most psychological theories the predictions from the theory are not often precise and indeed can lead to opposite conclusions. Many people when frustrated grin and bear it. Dollard and Miller would say that the cause of the frustration continues to exert its impact in such situations and it will manifest itself later in some other area (displacement).

I have always felt that the frustration aggressions theory is a variant of the conservation of energy. In a closed system, any input of energy must increase the energy of the system. If it's not allowed to express itself, then it remains as potential energy. Many of the early experiments that led to the development of the steam engines worked because the heat that was released from the burning of coal was used in relatively closed systems to raise the potential energy of a fluid, which would cycle back to its initial state by performing mechanical work to move a piston.

The question is how does the frustration aggression theory express itself in the stock market. Aggressive behavior can come from bullish or bearish activity, and it would seem to be measurable by the extent of an inordinate move. The situation that would seem to arise the most frequently occurs when you hold a stock and wait for it to announce something good, and it turns out bad. The most common disappointment is the bad earnings report, one considerably less than forecast. Another typical situation is the company that doesn't have its product or patent approved by some regulatory agency such as the FDA, or a court's invalidating the patent.

A frustration that we always find particularly noteworthy occurs when a certain well known spokesman for the tech industry, a folksy man from West Virginia, moves to center stage to talk about his company and his industry. There is so much hope surrounding such appearances and reports, that almost invariably whatever he says seems to lead to aggressive selling amidst disappointment. Indeed it seems after some of these reports that the entire frustration that investors have felt with the technology and Nasdaq bubble of the oughts is hurled at that small but doubtless well meaning West Virginian.

Extending this to the field of markets, any stock that fails to break through an important threshold would seem to be prone to frustrated behavior. Gold recently broke through $500 overnight, a 23 year high, but failed as of yet to close above $500 and this would seem to be frustrating to gold bulls. The Dow recently flirted with 11000, getting up to 10969. but as of yet has also failed to achieve the break through the round number.

I believe that frustration with the inapplicability or unprofitability of some commonly accepted ideas about markets are at the bottom of many exacerbated moves in markets. I call on readers to set forth hypotheses in this area, and we will try to refine more of our own and put some quantitative touches on these speculations.

Dr. Brett Steenbarger contributes:

When it comes to the frustration-aggression link, my mind always returns to Artie and his seminal insight that delinquency among male youth stems from a thwarting of the drive toward manhood. Delinquent behavior and gang membership are the enactments of manhood among those who lack better channels through sports and careers. Having spent time in male-dominated trading rooms, I can vouch for the degree to which market setbacks also are experienced as cuts to one's manhood. A trader who reduces his size after losing big is said to have lost his mojo, and he generally looks like a man who has lost his size. One trader likened the experience of putting on trades when he was frustrated by losses as "hitting" the screen--as if his orders were jabbing at unseen assailants. Sadly, the aggression born of such frustration does violence only to the traders' accounts.

The phrase used by traders when they impulsively make frustrated trades after losing their capital is "revenge trading". The Mafia exacted revenge when they as leaders--and their territories--were not treated with respect: to be a man of respect was paramount, and a slight to one's standing could only be met with revenge. So it is with revenge trading. Losses are measured not only in dollars, but social standing and must therefore be avenged.

The greats channel the aggression from frustration toward their own betterment. Dan Gable was no doubt the most successful wrestler in history. As a high school wrestler, he won his state championship three times and was undefeated in sixty-four consecutive matches. He proceeded to win 117 consecutive matches at Iowa State University, and he was the national champion twice. He was an Olympic gold medalist, and as a wrestling coach for the University of Iowa, his teams went 340-20-5 in dual meets.

After his 117 consecutive wins and two consecutive national championships, Dan Gable lost his final match of his collegiate career. Frustration brought him to tears as he stood on the stand in the place reserved for the runner-up. "Bottom line is that match helped me," Gable later related in the book A Season on the Mat. "I needed to get beat. Because it not just helped me win the Olympics, but it helped me dominate the Olympics. But more than that, it helped me be a better coach. I would have a hundred times rather not have that happened, but I used it. I used it."

It is difficult to predict who will use the aggression from frustration to rebuild themselves and who will become defeated or delinquent. Galton found that the essence of genius was:

...a nature which, when left to itself, will, urged by an inherent stimulus, climb the path that leads to eminence and has strength to reach the summit—on which, if hindered or thwarted, will fret and strive until the hindrance is overcome, and it is again free to follow its laboring instinct.

The greats are frustrated when their drive for mastery is thwarted, but the aggression fuels the overcoming of the hindrance. Maybe the great markets thwart their obstacles as well, and this might be one way of distinguishing eminent markets from merely mortal ones.

John O'Sullivan Adds:

When a new paradigm becomes generally accepted, there is a period of rapid extension and clarification. But Kuhn describes practitioners converging on a single paradigm by a variety of means, and I question whether there is such an accepted single paradigm in finance. With technical and fundamental analysis, the efficient markets hypothesis, behavioral finance and others it seems unlikely that theorists and practitioners will accept a single account for price action any time soon.

Mehmet Urcu Offers:

Caglar Tuncay, physics scholar from Middle East Technical University introduced an original method, assuming potential and kinetic energy for prices and conservation of their sum is developed for forecasting stock prices...He also showed its connections with Zipf's Power Law. The power-law behavior in the tails is characterized by the exponents and the exponents found in different stock markets very much resemble. Power-law behavior (Zipf plot) is decorated with log-periodic oscillations in his study.

From Dr. Phil McDonnell:

The phrasing "decorated with log-periodic oscillations" is a rather unique expression which I have only seen in Didier Sornette's book "Why Stock Markets Crash". Before our Turkish friend (or others) spends his time and money on that book it might be good to read my review published here.

Sornette is a geophysicist at UCLA who studies earthquakes using similar methodology based on power laws, fractals, critical points, "decorated with log-periodic oscillations", and tails of distributions. He seems to spend much of his time using his theories to predict stock market crashes. Before getting too far into this stuff ask yourself two simple questions. When was the last time anyone made a successful earthquake prediction? Why would I want to use that methodology to risk my money?

For a far better look at conservation laws and the stock market one should read the chapter in "Practical Speculation" by Niederhoffer and Kenner. It is a straight forward discussion of conservation laws without the unproven mumbo from chaos theory.

Russell Sears says:

I have found this hypothesis some what counter to the spirit of the speculator.

First, is the unspoken assumption that aggression is basically a counter-productive force an the goal of studying this should be to eliminate the aggression. As an athlete and capitalist I find this attitude counter to my nature. Competition aggression tends to reduce the causes of frustration, and often is productive. I get up most mornings very early to aggressively run, this tends to make the days minor frustrations go smoother. Now at my age when my best athletic performances are behind me, this is generally the motivating force.

Second, is the implicit assumption that the individual is not responsible for his actions, especially with-in a frustrated group. I believe it is these two reasons that I am drawn to the parallel in the works of John Steinbeck, a contemporary of Neal Miller. Particularly his 2 most famous books, "The Grapes of Wrath" and "Of Mice and Men". In Grapes of Wrath" he tries to use the F-A hypothesis as it applies to group behavior to exonerated the individuals actions. In "Of Mice and Men" he implies that all individuals as animals are as incapable of controlling their frustration-aggression as the mentally handicapped tragic figure.

In short both implies that authorities, the parents, the winners and the successful are responsible for any tantrums of self destruction aggression for revenge, not the individual committing them. Now I do not have the talent or the resources of Mr. E to predict when I will be trading against a frustrated immoral, pacifist, socialist. But hopefully I can recognize this at least currently, instead of retrospectively when incidents like 9/11 drop in equities or New Orleans spike in oil. For now my best advice is to assume frustrations will occur, run, exercise aggressively and routinely have productive competitive outlets for those frustrations. So you are not the one throwing a frustrated self defeating tantrums when the trading games goes against you.

12/04/2005
Jim Sogi on Aggression Theory

Regarding the Chair's post on aggression theory, I recommend Coercive Family Process Vol 3, by Gerald R. Patterson, a study of aggressive children in the family context. The author asks, why are children aggressive? The method is based on observable behaviors of clients, counting events, such as 'number of bites' (obesity), 'out of seat' and statistical analysis thereof. He was the pioneer in such studies. He found in the 50's as he began his career that the best was not good enough. The theory is based upon performance, what people do from a bilateral or interactional perspective, rather than underlying neuroses or a person's characteristics. He looked not only to the patients but also the behavior and effectiveness of the therapists and their results. This latter point is interesting to traders who might improve understanding by counting and tracking their own behavior and trading results in reference to the methods. The author makes extensive use of statistics and tables. Many of his studies seem to focus on the point at which ramping up of low scale factors led to coercive action, and parallels the all important "break point" in market movements.

"Direct observation of behavior can be the key for identifying how actual behaviors are elicited, maintained and organized." Description and explanation are different. Breaking down behavior into 6 second intervals led to analysis of the effect of the environment on behavior, and bilateral effects. While simple frequency count was the preferred dependent variable in the 1960's it was too clumsy to describe relations between events. Patterson found conditional probabilities; given one behavior, what is the likelihood of behavior by another to be workable.

What is aggression? It is both aversive and contingent. A dentist is aversive, but not contingent on certain behavior. Dr. Patterson found patterns of cursive behavior, when a child displays one member of such a subset, he is likely to perform others as well. This is the clustering idea. Patterson describes cursive behavior as occurring in bursts. Dr. Patterson used 29 category codes of variables in homes of aggressive children, coding the most obvious events. He counts base rates for various behaviors. Aggressive behavior appears consistently across setting and time and tends to continue. It is worthwhile to identify subsets of market behavior, gaps, intra range reversals, continuous up days without x point pull back bars, ranges, etc and find the related responsive behavior or other clusters. Range reversals usually occur in groups or bursts. Big run ups like at the end of November come in a "burst" of up days. Down days, drops like October, came in bursts of 8 days down in a row. Both the psychologists and the market find these statistically significant. He talks of the cursive events being chained together. The measure of behavior includes duration and latency periods. Timing is important in the market and measurement of duration and latency is predictive, important and under utilized.

Our culture is programmed to reward many kinds of aggression. Look at sports and war. Football players are highly compensated. In ancient times soldiers were amply rewarded. Roman Centurions were granted 100 hectares and exemption from taxes. Television displays several violent episodes per 1/2 hour. The markets can be viewed as a form of aggression. Entering the market by an affirmative act one takes from another participant at the bottom tick or hits the offer, then anticipates a large run up, at which point the position is sold to another participant at the very top, when the market should fall, taking money out of the other participants. This can be characterized as aggression in the essence of taking from others. It is reinforced. Being nice is not reinforced in the market.

"At the crux of the interactional stance is the idea that each member of a dyad changes the ongoing behavior of the other." Extrapolate to larger numbers and we see the development of S#ros' reflexivity theory as an outgrowth of behavioral psychology! Synchronicity and reciprocity encompass the functional relation between the behavior of one person and another embedded in larger structures. A prime example of synchronous action is turn taking during talking. Another example is chess. On the higher order political scale the doctrine of equality in response to combat action, such as Israel's policy toward Palestine, an eye for an eye and a tooth for a tooth. In the market on a micro scale is the flipping of transactions at the bid and ask, then there is the up down action from bar to bar and then at a higher level the structures we seek to catalog and predict; of interaction between buying and selling groups. The offshoots from Synchronicity are ripple effects. Actions reflect back with growing cycles of reflexivity. This has application to markets, the bouncing repeatedly in ranges, the multiple surges of a trend, the current expanding range cycle, triangle patterns. Action tends to be mirrored in the response. The overall theory is that the study of micro structure will lead to the explanation and understanding of larger structures.

12/04/2005
Jim Sogi on Aggression Theory

Regarding the Chair's post on aggression theory, I recommend Coercive Family Process Vol 3, by Gerald R. Patterson, a study of aggressive children in the family context. The author asks, why are children aggressive? The method is based on observable behaviors of clients, counting events, such as 'number of bites' (obesity), 'out of seat' and statistical analysis thereof. He was the pioneer in such studies. He found in the 50's as he began his career that the best was not good enough. The theory is based upon performance, what people do from a bilateral or interactional perspective, rather than underlying neuroses or a person's characteristics. He looked not only to the patients but also the behavior and effectiveness of the therapists and their results. This latter point is interesting to traders who might improve understanding by counting and tracking their own behavior and trading results in reference to the methods. The author makes extensive use of statistics and tables. Many of his studies seem to focus on the point at which ramping up of low scale factors led to coercive action, and parallels the all important "break point" in market movements.

"Direct observation of behavior can be the key for identifying how actual behaviors are elicited, maintained and organized." Description and explanation are different. Breaking down behavior into 6 second intervals led to analysis of the effect of the environment on behavior, and bilateral effects. While simple frequency count was the preferred dependent variable in the 1960's it was too clumsy to describe relations between events. Patterson found conditional probabilities; given one behavior, what is the likelihood of behavior by another to be workable.

What is aggression? It is both aversive and contingent. A dentist is aversive, but not contingent on certain behavior. Dr. Patterson found patterns of cursive behavior, when a child displays one member of such a subset, he is likely to perform others as well. This is the clustering idea. Patterson describes cursive behavior as occurring in bursts. Dr. Patterson used 29 category codes of variables in homes of aggressive children, coding the most obvious events. He counts base rates for various behaviors. Aggressive behavior appears consistently across setting and time and tends to continue. It is worthwhile to identify subsets of market behavior, gaps, intra range reversals, continuous up days without x point pull back bars, ranges, etc and find the related responsive behavior or other clusters. Range reversals usually occur in groups or bursts. Big run ups like at the end of November come in a "burst" of up days. Down days, drops like October, came in bursts of 8 days down in a row. Both the psychologists and the market find these statistically significant. He talks of the cursive events being chained together. The measure of behavior includes duration and latency periods. Timing is important in the market and measurement of duration and latency is predictive, important and under utilized.

Our culture is programmed to reward many kinds of aggression. Look at sports and war. Football players are highly compensated. In ancient times soldiers were amply rewarded. Roman Centurions were granted 100 hectares and exemption from taxes. Television displays several violent episodes per 1/2 hour. The markets can be viewed as a form of aggression. Entering the market by an affirmative act one takes from another participant at the bottom tick or hits the offer, then anticipates a large run up, at which point the position is sold to another participant at the very top, when the market should fall, taking money out of the other participants. This can be characterized as aggression in the essence of taking from others. It is reinforced. Being nice is not reinforced in the market.

"At the crux of the interactional stance is the idea that each member of a dyad changes the ongoing behavior of the other." Extrapolate to larger numbers and we see the development of S#ros' reflexivity theory as an outgrowth of behavioral psychology! Synchronicity and reciprocity encompass the functional relation between the behavior of one person and another embedded in larger structures. A prime example of synchronous action is turn taking during talking. Another example is chess. On the higher order political scale the doctrine of equality in response to combat action, such as Israel's policy toward Palestine, an eye for an eye and a tooth for a tooth. In the market on a micro scale is the flipping of transactions at the bid and ask, then there is the up down action from bar to bar and then at a higher level the structures we seek to catalog and predict; of interaction between buying and selling groups. The offshoots from Synchronicity are ripple effects. Actions reflect back with growing cycles of reflexivity. This has application to markets, the bouncing repeatedly in ranges, the multiple surges of a trend, the current expanding range cycle, triangle patterns. Action tends to be mirrored in the response. The overall theory is that the study of micro structure will lead to the explanation and understanding of larger structures.

12/04/2005
Jim Sogi on Aggression Theory

Regarding the Chair's post on aggression theory, I recommend Coercive Family Process Vol 3, by Gerald R. Patterson, a study of aggressive children in the family context. The author asks, why are children aggressive? The method is based on observable behaviors of clients, counting events, such as 'number of bites' (obesity), 'out of seat' and statistical analysis thereof. He was the pioneer in such studies. He found in the 50's as he began his career that the best was not good enough. The theory is based upon performance, what people do from a bilateral or interactional perspective, rather than underlying neuroses or a person's characteristics. He looked not only to the patients but also the behavior and effectiveness of the therapists and their results. This latter point is interesting to traders who might improve understanding by counting and tracking their own behavior and trading results in reference to the methods. The author makes extensive use of statistics and tables. Many of his studies seem to focus on the point at which ramping up of low scale factors led to coercive action, and parallels the all important "break point" in market movements.

"Direct observation of behavior can be the key for identifying how actual behaviors are elicited, maintained and organized." Description and explanation are different. Breaking down behavior into 6 second intervals led to analysis of the effect of the environment on behavior, and bilateral effects. While simple frequency count was the preferred dependent variable in the 1960's it was too clumsy to describe relations between events. Patterson found conditional probabilities; given one behavior, what is the likelihood of behavior by another to be workable.

What is aggression? It is both aversive and contingent. A dentist is aversive, but not contingent on certain behavior. Dr. Patterson found patterns of cursive behavior, when a child displays one member of such a subset, he is likely to perform others as well. This is the clustering idea. Patterson describes cursive behavior as occurring in bursts. Dr. Patterson used 29 category codes of variables in homes of aggressive children, coding the most obvious events. He counts base rates for various behaviors. Aggressive behavior appears consistently across setting and time and tends to continue. It is worthwhile to identify subsets of market behavior, gaps, intra range reversals, continuous up days without x point pull back bars, ranges, etc and find the related responsive behavior or other clusters. Range reversals usually occur in groups or bursts. Big run ups like at the end of November come in a "burst" of up days. Down days, drops like October, came in bursts of 8 days down in a row. Both the psychologists and the market find these statistically significant. He talks of the cursive events being chained together. The measure of behavior includes duration and latency periods. Timing is important in the market and measurement of duration and latency is predictive, important and under utilized.

Our culture is programmed to reward many kinds of aggression. Look at sports and war. Football players are highly compensated. In ancient times soldiers were amply rewarded. Roman Centurions were granted 100 hectares and exemption from taxes. Television displays several violent episodes per 1/2 hour. The markets can be viewed as a form of aggression. Entering the market by an affirmative act one takes from another participant at the bottom tick or hits the offer, then anticipates a large run up, at which point the position is sold to another participant at the very top, when the market should fall, taking money out of the other participants. This can be characterized as aggression in the essence of taking from others. It is reinforced. Being nice is not reinforced in the market.

"At the crux of the interactional stance is the idea that each member of a dyad changes the ongoing behavior of the other." Extrapolate to larger numbers and we see the development of S#ros' reflexivity theory as an outgrowth of behavioral psychology! Synchronicity and reciprocity encompass the functional relation between the behavior of one person and another embedded in larger structures. A prime example of synchronous action is turn taking during talking. Another example is chess. On the higher order political scale the doctrine of equality in response to combat action, such as Israel's policy toward Palestine, an eye for an eye and a tooth for a tooth. In the market on a micro scale is the flipping of transactions at the bid and ask, then there is the up down action from bar to bar and then at a higher level the structures we seek to catalog and predict; of interaction between buying and selling groups. The offshoots from Synchronicity are ripple effects. Actions reflect back with growing cycles of reflexivity. This has application to markets, the bouncing repeatedly in ranges, the multiple surges of a trend, the current expanding range cycle, triangle patterns. Action tends to be mirrored in the response. The overall theory is that the study of micro structure will lead to the explanation and understanding of larger structures.

 

12/04/2005
Jim Sogi on Aggression Theory

Regarding the Chair's post on aggression theory, I recommend Coercive Family Process Vol 3, by Gerald R. Patterson, a study of aggressive children in the family context. The author asks, why are children aggressive? The method is based on observable behaviors of clients, counting events, such as 'number of bites' (obesity), 'out of seat' and statistical analysis thereof. He was the pioneer in such studies. He found in the 50's as he began his career that the best was not good enough. The theory is based upon performance, what people do from a bilateral or interactional perspective, rather than underlying neuroses or a person's characteristics. He looked not only to the patients but also the behavior and effectiveness of the therapists and their results. This latter point is interesting to traders who might improve understanding by counting and tracking their own behavior and trading results in reference to the methods. The author makes extensive use of statistics and tables. Many of his studies seem to focus on the point at which ramping up of low scale factors led to coercive action, and parallels the all important "break point" in market movements.

"Direct observation of behavior can be the key for identifying how actual behaviors are elicited, maintained and organized." Description and explanation are different. Breaking down behavior into 6 second intervals led to analysis of the effect of the environment on behavior, and bilateral effects. While simple frequency count was the preferred dependent variable in the 1960's it was too clumsy to describe relations between events. Patterson found conditional probabilities; given one behavior, what is the likelihood of behavior by another to be workable.

What is aggression? It is both aversive and contingent. A dentist is aversive, but not contingent on certain behavior. Dr. Patterson found patterns of cursive behavior, when a child displays one member of such a subset, he is likely to perform others as well. This is the clustering idea. Patterson describes cursive behavior as occurring in bursts. Dr. Patterson used 29 category codes of variables in homes of aggressive children, coding the most obvious events. He counts base rates for various behaviors. Aggressive behavior appears consistently across setting and time and tends to continue. It is worthwhile to identify subsets of market behavior, gaps, intra range reversals, continuous up days without x point pull back bars, ranges, etc and find the related responsive behavior or other clusters. Range reversals usually occur in groups or bursts. Big run ups like at the end of November come in a "burst" of up days. Down days, drops like October, came in bursts of 8 days down in a row. Both the psychologists and the market find these statistically significant. He talks of the cursive events being chained together. The measure of behavior includes duration and latency periods. Timing is important in the market and measurement of duration and latency is predictive, important and under utilized.

Our culture is programmed to reward many kinds of aggression. Look at sports and war. Football players are highly compensated. In ancient times soldiers were amply rewarded. Roman Centurions were granted 100 hectares and exemption from taxes. Television displays several violent episodes per 1/2 hour. The markets can be viewed as a form of aggression. Entering the market by an affirmative act one takes from another participant at the bottom tick or hits the offer, then anticipates a large run up, at which point the position is sold to another participant at the very top, when the market should fall, taking money out of the other participants. This can be characterized as aggression in the essence of taking from others. It is reinforced. Being nice is not reinforced in the market.

"At the crux of the interactional stance is the idea that each member of a dyad changes the ongoing behavior of the other." Extrapolate to larger numbers and we see the development of S#ros' reflexivity theory as an outgrowth of behavioral psychology! Synchronicity and reciprocity encompass the functional relation between the behavior of one person and another embedded in larger structures. A prime example of synchronous action is turn taking during talking. Another example is chess. On the higher order political scale the doctrine of equality in response to combat action, such as Israel's policy toward Palestine, an eye for an eye and a tooth for a tooth. In the market on a micro scale is the flipping of transactions at the bid and ask, then there is the up down action from bar to bar and then at a higher level the structures we seek to catalog and predict; of interaction between buying and selling groups. The offshoots from Synchronicity are ripple effects. Actions reflect back with growing cycles of reflexivity. This has application to markets, the bouncing repeatedly in ranges, the multiple surges of a trend, the current expanding range cycle, triangle patterns. Action tends to be mirrored in the response. The overall theory is that the study of micro structure will lead to the explanation and understanding of larger structures.

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