Many years ago I wanted to date a friend of mine. When I called her, sometimes she was nice and would talk. This gave me hope. The same hope you have when markets rebound after a sell off for a few sessions even with light volume. Sometimes she would tell me: "Call me back in five minutes. I am doing something very important." When I called back after five minutes, she would not pick up the phone. Or if she finally did, she would say: "Sorry. I am leaving now. Can you call me this evening?" When I called her later, I wouldn't simply find her at home, she would be busy brushing her teeth or shampooing her hair. Eventually I didn't succeed in my efforts and I gave up. Low after low, rebound after rebound, you refuse to accept that you are in a bear market. You keep on insisting as stubborn as ever. And your losses mount. You refuse to see signals that are very clear to those not emotionally involved in the situation. And you average your positions as prices go down, with horrible outcomes. As if, in the case of my girlfriend's story, hope resulted in a mortal disease.

At the same time, I like to remember the epic fight between Rocky Balboa and Lang. Rocky was feeling the pain of his opponent's tough punches. Lang said: "I'm gonna torture him. I'm gonna crucify him. Real bad." Rocky replied: "You ain't so bad, you ain't so bad, you ain't nothin'. C'mon, champ, hit me in the face! My mom hits harder than you!". Lang expended his energy trying to knock Rocky out. Rocky eventually retaliated and knocked the confused Lang out with an impressive counter-attack. The 9% plunge few days ago hurt me much less than the downtrend did back in October. Eventually you get used to these plunges. You get prepared to expect very negative events. Hopefully bears will get exhausted like Lang did and we will eventually see higher prices and a trend reversal. The selling pressure at a certain point will ease and the bulls will prevail with a fast and sudden counter trend as Rocky came back and surprised his opponent.

Kim Zussman comments:

It's hard to imagine that most traders can discern random from non-random, not to mention that even scientists have trouble with the subtleties (pertinent variables, sample size, learning set selection, multiple hypotheses, causation vs. association, etc.).

Another way to assess this is whether statistically astute traders do better (under all market conditions) than innumerates.

Dan Grossman remarks:

Regarding the girlfriend story, it is a principle of behavioral psychology, and gambling, that random reinforcement is highly addictive. 

Victor Niederhoffer replies:

One should carefully consider whether there is any evidence that random reinforcement is better than systematic reinforcement or punishment in inducing behavior. The evidence is very mixed and inconclusive last time I studied it.

Gibbons Burke writes:

The wikipedia article on Operant Conditioning in a sub-article titled Reinforcement provides a decent trailhead to further references, as well as criticisms:

Effects of different types of simple schedules

• Ratio schedules produce higher rates of responding than interval schedules, when the rates of reinforcement are otherwise similar.

• Variable schedules produce higher rates and greater resistance to extinction than most fixed schedules. This is also known as the Partial Reinforcement Extinction Effect (PREE)

• The variable ratio schedule produces both the highest rate of responding and the greatest resistance to extinction (an example would be the behavior of gamblers at slot machines)

• Fixed schedules produce 'post-reinforcement pauses' (PRP), where responses will briefly cease immediately following reinforcement, though the pause is a function of the upcoming response requirement rather than the prior reinforcement. • The PRP of a fixed interval schedule is frequently followed by an accelerating rate of response which is "scallop shaped," while those of fixed ratio schedules are more angular.

• Organisms whose schedules of reinforcement are 'thinned' (that is, requiring more responses or a greater wait before reinforcement) may experience 'ratio strain' if thinned too quickly. This produces behavior similar to that seen during extinction.

• Partial reinforcement schedules are more resistant to extinction than continuous reinforcement schedules. • Ratio schedules are more resistant than interval schedules and variable schedules more resistant than fixed ones.


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