Apr

15

Her is a good case study in attribution errors, illusion of control, and other cognitive biases that relate to financial markets.

In memory of Kurt Vonnegut, from Slaughterhouse Five:

"It was about an Earthling man and woman who were kidnapped by extra-terrestrials. They were put on display in a zoo on a planet called Zircon-212. These fictitious people in the zoo had a big board supposedly showing stock market quotations and commodity prices along one wall of their habitat, and a news ticker, and a telephone that was supposedly connected to a brokerage on Earth. The creatures on Zircon-212 told their captives that they had invested a million dollars for them back on Earth, and that it was up to the captives to manage it so that they would be fabulously wealthy when they were returned to Earth.

The telephone and the big board and the ticker were all fakes, of course. They were simply stimulants to make the Earthlings perform vividly for the crowds at the zoo–to make them jump up and down and cheer, or gloat, or sulk, or tear their hair, to be scared shitless or to feel as contented as babies in their mothers' arms.

The Earthlings did very well on paper. That was part of the rigging, of course. And religion got mixed up in it, too. The news ticker reminded them that the President of the United States had declared National Prayer Week, and that everybody should pray. The Earthlings had had a bad week on the market before that. They had lost a small fortune in olive oil futures. So they gave praying a whirl.

It worked. Olive oil went up."

Also, from a column by Bloomberg's Mark Gilbert:  

One of the tests featured a chart on a computer screen. The line on the graph started at zero, and then increased or decreased every half-second for 50 seconds. The traders were told that pressing keyboard keys Z, X or C might affect how the chart developed. When the chart stopped moving, they were asked how much influence they thought their typing had on the chart.

The test was a placebo. The typing had zero effect on how the graph developed. While some traders realized the chart was predetermined, others were convinced they had full control. (The mental image of a guy in shirtsleeves bashing impotently at a keyboard, convinced he's making a difference, is very appealing. Not so different from what he does for 10 hours a day, maybe.)

`The results produced a statistically significant negative association between illusion of control and both total remuneration and desk profits, but not risk management, analytical ability or people skills,' the authors wrote. `There is a clear case for saying illusion of control is associated with poorer performance and lower earnings.'


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