Dec

5

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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2 Comments so far

  1. Anonymous on December 5, 2008 5:26 pm

    Today’s rally in the face of a dismal jobs report has all the signs that the “girlfriend” is finally going to call back.

    Confidence has been flushed out on all fronts including the commodity related stocks that suffered a well needed final flush thanks to a big copper and gold producer that suspended its dividend.

    A perfect background for a slow and stubborn rise in equities. Lock and load…

  2. douglas roberts dimick on December 7, 2008 1:04 pm

    Relative to most of you, I do not know much about trading. My work during the past 7 years learning how to design and engineer a program trading system has been in stead course not to trade (in a trading sense).

    That said, during book research these past two years here in China, I recall one particular, personal tour by the manager of a sixth nationally ranked securities firm’s branch office.

    Working our way to central ops, we finally arrive at the trading room.

    When introduced to the head trader, I asked him why he was successful. I noticed most screens in China displayed variations of MACD.

    1.3 billion people (or maybe .4 or .5 or .6, as no one seems really sure, as I guess there are too many to keep track), represent the “potential” largest world’s financial services and investment market. Still, today, the giant paper wealth generator here appears to ebb and flow along this one, rather dated indicator.

    Aha, I notice the firm’s star trader has Bollinger Bands on display. Is this the secret to his success, I press?

    With his boss, my friend, peering across, he sort of shuffled in his chair, looked down – Chinese here seem to do that a lot — and mumbled about the government.

    When we head back down the hallway to the office, I asked “what the heck” was that guy talking about?

    I was told that he said “supply and demand.” OOOKaaay… and so…

    Privatization a la Red Chinese Corporate Buffet means that the government sells one third to some trusted party member(s), retains one third, and sells as little as possible of the balance to create enough interest… so they (party and government) can then go and dump stock (reportedly at times against proscribed rules) once prices rise.

    Who’s money are they taking? I read news here of a national study that reported 80% of Chinese market investors lose money, so I guess “who” would be all the little people with big dreams (and foreign dopes).

    Translated and processed regarding our head trader? Perhaps he has inside info with government minions?

    Who knows? Who cares… the system is a parlor game. You know this when you walk in the door.

    How? As an American, relatively speaking, I find that Chinese securities firm branch offices present a Feng Shui blend of bus station and race track décor and ambiance. Enough said – though, also note a hint of Italian bordello-ish-ness.

    This last impression must be a Chinese subtlety for reminding one that lawyers are of no use here – they don’t seem to be very welcome throughout China, come to think of it.

    That’s odd… I am noticing reams of HR listings for lawyers needed in China.

    Note to self: what is mortality rate of foreign lawyers here?

    The central government must have numbers on this… notice how quickly they get out key economic reports for worldwide consumption… almost like tomorrow’s news today… You don’t think they are…?

    Alternatively… back to the foreign lawyers, Bleak House (Revisited)? The China version (or syndrome)?

    I SHARE ALL THIS but I cannot say how it might relate to girls and boxing. Love that title though — smart guy…

    I only comment that we might keep in mind our star, head trader’s cloaked wisdom (“supply and demand”) with regards to redemptions and recognition (not just realization) of subsidiary insolvent banking channels yet to drop onto one of many Florida-ballot-chad-like balance sheets.

    Perhaps markets and traders have insights that “enable” (an AA clinical term, ahem…) all that detail stuff… many certainly seem to have done so swapping back and forth derivatives.

    Hmm, let’s see, we bought it today for $52.50… must be worth $54 tomorrow… Just look at the real estate market. Right, that’s the ticket…

    Hey, as long as I am getting mine, who cares — heard and saw a lot of that thinking during recent years as well.

    Kind of like musical chairs, right up to the point where the leasing company shows up to take the chairs back… and the piano… and the karaoke machine… and the espresso maker… and the Warhol… and, well, just take it…

    Not sure if this is any consolation, but I know a guy who has been in the securities markets for 30 years, tour in Nam, went to lot better schools than me… He says the support level is around 7500; if that breaks, 5500.

    Can we watch the boxing match now?

    dr

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