Oct

17

Deception theory often refers to the eight basic emotions communicated through facial expressions: anger, fear, sadness, joy, disgust, curiosity, surprise, acceptance. Are these emotions manifested in markets? Are they predictive? Do they change? Is the theory of deception useful for studying, understanding and predicting markets?

I am reaching a point where I am frequently asked to give lectures on markets, a point usually related to about 3 to 5 years before one receives a bevy of awards, which is usually a year or two from the awarder's estimate of your death. I think I will try to develop a theory of deception from biology and game theory that will substitute for my usual talk on music and markets, which takes tremendous physical and financial resources, and is similarly poignant to the audience.

Alan Millhone comments: 

Dear Chair

Most master checker players notate (record moves) while playing. A few would write down the wrong move and let their opponent see what they record on their game sheet — then they move elsewhere. I can see where this might disrupt their opponents thoughts.

Are there traders who position one way for all to see then do otherwise ?

Sincerely,

Alan

Anatoly Veltman writes:

Within the 1980s COMEX floor hierarchy, there was the Price Committee. Say, Gold traded 364.0-364.5 closing range. If I were going home short, I'd ask my influential broker, who was on that committee, to make sure day's settlement price is fixed at 364.2; if I were Long, I'd ask for 364.3. Sounds trivial– but when I carried 3,000-lot positions, it would put instant $30,000 in my pocket, day into day. I can only imagine shenanigans in the OPTIONS after-pit, where they settled hundreds of different strikes daily– and some might have carried 50% price discretion!

In any case, here comes the punchline: shrewd floor operators, who didn't carry overnight positions but loved to push Gold around during pit trading– kept tab of post-bell haggling. One fateful day, seeing Gold gap way against my position, they kept pushing the trend all day just to cause me margin liquidation. That one-day loss swallowed all of the settlement-print windfall collected for the year. 

Jordan Low adds: 

In Blink by Malcolm Gladwell, a game of chance drew cards from two piles. The bad pile that lead to losses was avoided at some point consciously, but the subconscious detected that pattern before the conscious. I, of course, tried to measure my sweat, heart rate etc before each trade. Am I deceiving myself on an opportunity when I am just trying to get a gambler's high? I couldn't find anything useful except that hearing the news is negative to my process. Reading subtitles and skipping the music is probably better. Perhaps there might be technology to read the general emotions on TV using facial recognition one day.

Jack Tierney, the President of the Old Speculator's Club writes: 

This idea of yours, Victor, reminded me of a book I recently finished, River of Doubt. It's an interesting account of Teddy Roosevelt's post-presidential, near-fatal adventure into unknown portions of the Amazon. While much of the story revolves around the encounters, challenges, and actions of the discovery team, significant portions tell an interesting story of Amazonian flora and fauna adaptations.

Some of these occur over large portions of the region, others might exist in an area measured in square yards– almost all, though, occur with incredible rapidity and are developed to attack very specific prey. As one might expect, within another very short period of time, it, too, is the prey of a newly evolved predator.

Of the different adaptations briefly encountered in the book, the one that aroused my curiosity the most is called "masting." I had never before heard the term and subsequently looked it up and did a little research:

Mast is a noun… that refers to the accumulation of various kinds of nuts on the forest floor that serve as food for… animals. The process… is known as masting…. it is not a continuous process, but rather is cyclic. Approximately every three to five years certain trees produce prodigious quantities of nuts; in between the "masts" they will produce almost none. "There are two elements of the economy of scale hypothesis for masting variability: First, predator satiation - by producing a gargantuan nut crop, the predators become satiated [and enough] nuts will survive to succeed in propagation. The predator population is held in check during the non-mast years. Second, [p]ollination efficiency - masting trees are wind-pollinated…from staminate to pistillate flowers, a rather precarious and random process…it is therefore advantageous for them to fill the air with pollen from many trees at the same time.

The masting trees' surreptitious and unpredictable flowering, as well as the feast-or-famine results experienced by its "predator" classes might parallel some of the actions/consequences of the flexions as they periodically feed and starve the lesser fuana.
 


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10 Comments so far

  1. steve on October 18, 2011 12:10 am

    I would suggest you employ either Nancy Pelosi’s speaking coach. You will learn how to become a pathological liar and do it with a completely straight face.

  2. Nick Pribus on October 18, 2011 9:23 am

    Deception is king in complex negotiations and transactions between counterparties. Though the Wall Street occupiers might decry the immorality of deception on many levels, the base of capitalism is to be allowed secrets; one is and should be under no obligation to disclose the cost structure of operations to a willing buyer. Sklansky’s fundamental theorem of poker states that: every time you play your hand the way you would if you could see your opponent’s cards, you gain, and every time your opponent plays their cards differently from the way they would play them if they could see your cards, you gain. Using deception in this matter is no more illegal or immoral than throwing a punch in a boxing match, or when trading. Each opponent knows the rules, risks, and strategies, and cannot cry foul when the bob and weave does indeed succeed. Unless you are of course that boxer who is simply too-big-to-lose when congress might propose legislation ensuring no punches fall at all when you step in the ring no matter how poorly you fight. But that law and the politicians behind; are they not also practicing the fine art of deception?

  3. Andre Wallin on October 18, 2011 10:48 am

    when i get up at 1amcst and stay to 6 the market’s best opportunities are between 6 and 8 and when I wake up late it is the reverse. why does it keep changing? maybe a trader should be up the opposite of best opportunities of the prior day as others are chasing the past the next day. =)

  4. Leo on October 18, 2011 10:18 pm

    Speaking of deception, there are the ancient Chinese
    36 stratagems for reference.

    Stratagems when in a superior position

    1. Sneak across the ocean in broad daylight
    - Cross the sea under camouflage

    2. Surround one state to save another.
    - Besiege Wei to rescue Zhao

    3. Borrow a sword to attack another.
    - Kill somebody by using another person’s knife (kill someone through the agency of another)

    4. Face the weary in a condition of ease.
    -Wait at ease for the fatigued enemy

    5. Plunge into a fire to pull off a robbery.
    - Loot the burning house

    6. Feint east, strike west.
    - Make faint to the east but attack in the west

    Stratagems for confrontation 敵戰計

    7. Make something from nothing.
    - Produce something out of nothing

    8. Cross the pass in the dark.
    - Advance to Chencang by a hidden path

    9. Watch the fire from the opposite bank of the river.
    - Watch the fire from the other side of the river (showing non-concernedness)

    10. Hide a sword in a smile.
    - Conceal a knife in your smile

    11. One tree falls for another.
    - The plum dies for the apricot

    12. Take the sheep in hand as you go along.
    - Make off with a sheep in passing by

    Stratagems for attack 攻戰計

    13. Beat the grass to startle the snakes.
    - Beat the grass and frighten away the snake

    14. Borrow a corpse to bring back a spirit.
    - Resurrect in a new guise

    15. Train a tiger to leave the mountains.
    - Lure the tiger out of the mountain

    16. Let the enemy leave in order to catch him
    - Let the enemy off so to snare them

    17. Toss out a glazed tile to draw a jade.
    - Cast a brick to attract a gem

    18. To capture the brigands (rebels), capture their king.
    - Catch the ringleader first in order to capture all his bandit followers

    Stratagems for confused situations混戰計

    19. Take the firewood out from under the pot.
    - Take away the firewood under the cauldron

    20. Stir up the waters to catch fish.
    - Fish in troubled water

    21. The gold cicada molts its shell.
    - Cast off the molted skin/gold cicada casts off its shell

    22. Lock the gates to catch the bandits.
    - Close the gate to catch the thieves

    23. Make allies at a distance, attack nearby.
    Befriend distant countries while attacking those nearby

    24. Borrow the right of way to attack the neighbor.
    - Conquer Hao after obtaining permittance to cross another country

    Stratagems for gaining ground 並戰計

    25. Steal a beam to replace a pillar.
    - Replace the beams and pillars with rotten timber

    26. Point at one to scold another.
    - Point at the mulberry only to curse the locust.

    27. Feign ignorance without going crazy.
    - Feign foolishness

    28. Let them climb the roof, then take away the ladder.
    - Take away the ladder when the enemy is in the second floor

    29. Make flowers bloom on a tree.
    - False flowers on a tree

    30. Turn the guest into the host.
    - Make the guest to the host

    Stratagems for desperate situations 敗戰計

    31 Scheme with beauties (Beauty Trap)
    - Scheme with beauties

    32 Scheme with an empty castle (Empty castle ploy)
    - The stratagem of (open gates and) an emptied city (with soldiers waiting in ambush)

    33. Scheme with double agents. (Sow discord in the enemy’s camp)
    - The stratagem of sowing the seeds of discord (among the enemies)

    34. Scheme with self-inflicted wounds.
    - The stratagem of self-mutilation (in order to lure out the enemy)

    35. Scheme in continuous circles (Interlocking stratagems)
    - The stratagem of combining rings (of various stratagems)

    36. Know when It is best to run (When retreat is the best option)
    - The best stratagem is to run away

  5. Leo on October 19, 2011 1:43 am

    To Anatoly Veltman:

    Your comment about setting the settling price is very interesting. I can understand that it could help with an account of relatively low cash balance, or that it could make you feel better going home. But, does it have other real benefits?

    I have been wondering about this for quite some time. I trade commodity future in China. According to the regulation, the settlement price is determined everyday as the middle of the day’s range - not after-hours market. I quite often see that I made say 1 million at the closing prices, only to discover the next morning that I only made 600,000 for instance. It is as if a thief has robbed by account. Of course there are opposite cases, where I lost 1 million at the closing but discovered the next morning only a loss of 500,000. I rarely experience this opposite benefit because when I lose, my system would either let me cover it or reverse my position during the day, so it is the losing side that I experience often.

    Is there anything to do about it?

  6. Anatoly Veltman on October 19, 2011 10:22 am

    I’d be very surprised if indeed they settle at median price of daily range, with no weighting to volume traded at various prices. We in the US know little of China exchanges; may I suggest you try to e-mail an article…

  7. Leo on October 20, 2011 1:47 am

    To Anatoly Veltman,

    Thanks very much for the response.

    For commodity futures, the Shanghai exchange uses the median of the daily range, while the other two exchanges use the volume weight average of the daily trading.

    Could you clarify which article you would me to email to where?

  8. Anatoly Veltman on October 20, 2011 10:10 am

    If you write your overview of China exchanges and your niche trading them - try e-mailing Vic, and he may publish it for us to see

  9. vic on October 20, 2011 12:18 pm

    Vic is happy to publish anything that’s a meal for a life time consistent with the British Navy rules of diplomacy that any of our good readers care to send. I find that our average reader is more erudite and sapient that I am, and we learn much from them. That’s one of reasons we keep the site going, other than our love of the chase and the game.

  10. Leo on October 20, 2011 5:38 pm

    Thanks Anatoly and Vic.

    Currently I don’t have a relevant article handy on trading commodities in China. But I will try to write one shortly for anyone interested. If any of you have specific questions, I will try to help address them. Just kindly inform what is the best way to email to Vic. My email address is included with this comment.

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