Deception or Self-Deception, That is the Question, By GM Nigel Davies

December 26, 2006 |

The case for deception in markets is an interesting one, but for several reasons I hypothesize that what we are seeing may be self-deception:

Deception on such a large scale would imply that some kind of collusion is involved by market participants as no one source of participants is large enough to move a liquid market.
Let’s say that last time there was a particular memorable event a related market moved sharply in a particular direction. Those who were stung the previous occasion are likely to liquidate their positions on the basis of ‘once bitten, twice shy’. Thus they move the market in the opposite direction to last time prior to the event in question.

Steve Bal adds:

On the second point, I would add that memory is different for market participants. For some it may just be the most recent event, for some it is an average of the past events or a weighted form, or it could be the most prominent event from the entire past that has the most bias.

In either of the scenarios it would be limited to a group of traders who provide some market liquidity and not to the group as a whole. As the markets move ahead it is the group of traders who have been stung (such as this past week) who will pay a higher price to re-enter the stocks they sold. They will willingly pay more to re-enter the game than be left behind in the new year.

Investors behave as traders but consider themselves investors.

Steve Leslie adds:

In human endeavors I notice similar themes in mimicking. Bullies also try to intimidate verbally with overt threats. Scut Farkus in A Christmas Story exemplifies this mimicking behavior.

They are the ones who rant and rave, throw fits and expend massive amounts of energy in an attempt to subdue those around them in lieu of physical confrontation.

In my experience however the more boisterous someone is, the less secure they are. A case in point is North Korea today. their rhetoric is loud yet how much substance do they have behind such threats.

And in the human species it is the quiet ones you watch out for.

Every martial arts expert I have ever met has been on the quiet side. Yet when they explode it is quite terrifying and extremely lethal. Bruce Lee was a fabulous example of this.

For further edification on this I strongly suggest a short book by Joe Hyams, called Zen in the Martial Arts.

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