Oct
9
Question of the Day, from Victor Niederhoffer
October 9, 2009 |
Everyone who has thought about it knows that behavioral biases of Kahneman and Tversky et. al. are completely contrived and not really biases at all but rules of thumb people have developed to help them take the path of least resistance or save time or expense or make a buck fast. But what are some real weaknesses or tendencies that people have that affect their behavior that could be useful to know?
I am thinking for example about what they say about men — that 3/4 of the way through a lecture, 80% of the men are thinking about romance etc.
I find the tendency of partner discord around Valentines Day a real effect, or the tendency of people to get angry before they've eaten ([(this is due for example to the influence of parasites such as p. gondi on people who have cats — it affects only 25% of the population, although everyone I know gets afflicted by this tendency, also including the much reduced personages at this office, as I noticed at noon today)]).
Also, the tendency to be joyful at having one's losses turn to break-even, or worse yet, the tendency when a loss turns into a small profit, to be so joyful that one can't take a reasonable profit, or much better the tendency, all too rare, to be complacent when one has a good profit and it turns into a fair profit.
The tendency also, for time to pass so quickly when one is involved in a flow activity (all too rare) and for it to drag on endlessly when one is — well, I will not complete that.
What are the real psych weaknesses of behavior that people have that should be quantified, rather than the ones that win you a Nobel Prize for being p. c. and that you can run on college students for a buck?
Alston Mabry says:
There is what I like to refer to as the "one-way street" bias: Whatever I do that disadvantages someone else is perfectly justified given the circumstances; but when some else's actions disadvantage me, it is an outrage.
The most obvious use in public discourse is to determine who is long and who is short on any given issue.
James Sogi reports:
I am reading one of the most fascinating books ever on game theory. The underlying idea is that people all act in their self interest, such that it can, and has been quantified. Game theory offers a good alternative model to the statistical model and avoids the problems inherent in statistical analysis of jumps and changing cycles. It is called the The Predictioneer's Game: Using the Logic of Brazen Self-Interest to See and Shape the Future, by Bruce De Mesquita. The main thing is to identify the true issues, not necessarily what people say they are.
Nick White avers:
The instant thing that comes to mind — perhaps my own bias — is taking risk around bonus seasons; or, more specifically, the months prior when the books are being tallied for the year. Be hard to isolate the signal from the noise, but easy to test?
I am likely to be far more cautious taking a needless big swing at something when the year has been good and I know the final reckoning is just 'round the corner.
Also — reminiscent of the Gambler's Ruin discussion in EdSpec — might one not find that particularly bad years for the market exhibit increased risk taking and greater daily ranges as those who are behind the curve swing for the fences while the edge is against them, to have one last desperate shot at the title?
On a micro level, I have found that those expecting a child or entering into a serious new life commitment (marriage, mortgage, new moonlighting venture, death of a relative) definitely change their attitudes toward risk. There may be some seasonality present in those events that could be tested vs the market?
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I don't understand why people refuse to sell stocks at a loss, why so many of them want to wait to break even. I wish I could find the average holding price of a stock, I would bet dollars to donuts that heavy selling pressure comes in once the average holding price is exceeded.
Romance?
Behavioral science says someone might still be kidding themselves.
Some may need to tune into to a little Adam Carolla?
His comments on the behavioral aspect of it all come with zero pulled punches.
Like the psychic weakness of selling a commodity trading unit for $250 million! And the psychic strength of those sitting on Wilshire Blvd. in Westwood, CA!
one possible thought on why people will not sell stocks for a loss and thus follow it into oblivion. That would admit defeat. That is painful for many. And people in general avoid pain more than they seek pleasure. Another possible thought is that in some minds the inner dialogue would be "I made a mistake buying it. Now if I sell it and it goes back up, then I made another mistake." That would mutiply the mistake by a factor of two. Is this misguided thinking of course but that is what most of us do when we are confronted with a choice and under stress.
In my view, the battle is not out there in the world and in the markets, the battle is in the mind. One of the great traders said and I paraphrase " Now you have a trade, manage it."
I have seen this character flaw displayed innumerable times at the poker table. Example: A player is dealt a great drawing hand such as A-K. or J-10. The flop comes and he hits air. A bettor comes out and fires at the pot. The A-K calls. Turn comes and still no help. One more bet. And one more call. The river and nothing. Now a big bet and the A-K lets it go. The player just could not release the hand after he obviously was behind on the flop. He pays off someone who should not have been paid off. And then you hear the common phrase I had A-K "I had to call or how do you let A-K go." What started out as a great drawing hand turned into a loser which happens most of the time. Now he is ratonalizing his poor play. This is the difference between a top player and a fish. The top player has the character to let his had go without remorse or persecution. The fish just can't.
Bob,
“I wish I could find the average holding price of a stock, I would bet dollars to donuts that heavy selling pressure comes in once the average holding price is exceeded.”
I believe this is what chartists believe they are looking at when they say there is resistance at a certain level. It is the point at which everyone who has been down recently will have made their money back.
A Way to the Path – Quantifying “Psych Weaknesses” a la Maslow per Shaolin
Presently, I am editing my book project, Elements of Dao Ge English. This text provides my (Bring to Life) paradigm and pedagogy to help ESL (English as second language) learners improve fluency.
During my three years here in China with study of the pragmatics and linguistics involved, I concluded that human energies may be aligned to the verbal and physical components of English in accordance with the ancient Chinese philosophy, Shaolin.
Shaolin presents nine animal energy levels that may be found and mastered within each of us. For interactive learning purposes, I incorporate Maslow’s Hierarchy of Needs to develop progressive selections of topical and situational interaction of dialogue subject matter.
Maslow’s Hierarchy of Needs
Self-Actualization: fulfillment, creativity, purpose, inner-talent
Self-Esteem: achievement, recognition, respect, mastery
Belonging and Love: friends, family, spouse, lover
Physiological: food, water, shelter, warmth
Having drafted 12 companion dialogue books based on Maslow’s needs, I conclude that human frailties (and strengths) may be found with either the absence or abundance of those corresponding needs. The challenge here would be how to devise and apply a rules-based scale of metrics to quantify corresponding weaknesses.
The battle is always in the mind. In sports everyone says he wants to touch the ball at crunch time but only the winners mean it. Tiger Woods wants the 10 footer on the last hole to win the tournament. He wants to be in the position to win. Terry Bradshaw was by many accounts an average quarterback except when it came to Super Bowls. Same with Joe Montana. Some remarked that out of his football gear he just does not look like a football player. Same with Gretzky physically he is not that impressive. There is a phenomenon in psychology call "Fight or Flight" This is the moment of truth when an animal is confronted with two options. Some take the third option which is to do nothing. Which is always the worst option. They end up a casualty. Here is a link to Patton's most famous speech in front of the third Army on June 5th 1944 It is worth reading. http://www.pattonhq.com/speech.html
@ Mr. Dimick,
Does David Carradine offer market predictability with his training? Is it possible for a blind man to catch a buzzing fly using only chopsticks? Is eastern philosophy better than western regarding market predictability, and if so, why hasn't their averages moved into the stratosphere? When will you publish your QR theory to the list? Inquiring minds want to know. Also, why the reiteration of Maslow, I'm sure the list is quite familiar with it.