Jul

29

 Mitchell and Thomspon list 4 levels of deception in animals: false markings, false behavior, feigned injury, and verbal deception. What examples of such deception can be found in markets? Is such a classification or consideration useful?

Shane James writes: 

1. Verbal Deception: Central Bank Currency announcements. At one time it was Negara, then the BDF, then Bundesbank then BOJ…. Lately, the Russian CB has become master at attempting to wrong foot the markets about its intentions. Comments like "we think the CAD is a good addition to our reserves." The market buys it then the CB sell CAD into strength. (No need to mention The Yoga Billionaire in the fixed income world)

2. False Behavior: repeated failure to take out the round number in the lead market. Encourages traders go against with stop loss orders just above the round.

3. False Markings: Extended periods of obviously measured (say, close to close) co-movement in related assets that encourage simplistic approaches AFTER the form has peaked.

4. Feigning Injury: Many consecutive down days in markets that have negative serial correlation, into relevant minima. Most obviously the stock markets.

2, 3 & 4 can and have been quantified. Verbal deception is something harder to 'count' as it were. Although, I have had exposure to speech recognition software applied to financial commentary that could easily be programmed to perform or not perform a certain action when specific words are used.

Gary Rogan writes: 

We've talked about this before, but I think there needs to be a clear separation between a market participant and/or interested party practicing deception on the one hand and the market as a whole behaving in a deceptive way in a kind of "evolved" fashion. While it's entirely obvious why a single sentient participant or a small consortium of such would want to deceive the market for their specific purposes, it's far from clear why the market would evolve a deceptive technique.

In nature, only the first "paradigm" has analogues. A bird would feign injury or a moth evolve to be able to better blend with the surroundings to protect a biological entity that can pass genes to the next generation, and it's a simple feedback process: adapt or die, with deception being one of the many tricks in the bag of ticks that evolution possesses.

Over the many years of discussing deception here, I have failed to understand what's in it for the market to adapt deceptive behavior. You may say that it evolves to benefit the top feeders, but why? In nature, the grass of the savannah or the weather patterns do not evolve to benefit the lions and hurt the antelopes, while the antelopes certainly evolve to escape the lions in "deceptive" patterns or to jump high to demonstrate their supposed fitness and the lions evolve to hide their intentions from the antelopes as much as possible, but this is just a race between two co-evolving species, not a net benefit to the lions.

The first category below is clear as day, but are the rest there because some powerful market participants are able to explicitly or implicitly cooperate to fool the less powerful or is there some natural imperative for the market to fool as many people as possible because that's the path of least resistance?

Shane James writes: 

The slowness of change and human cognitive behavior probably produces the environment for deception shenanigans to be executed. Though it's only a sup group not the main meal. Getting back to our diet example… and the fruit and veg solution… if groups were that smart as a whole then simple problems would be cleared up far sooner, but procrastination and laziness even in this day and age holds the upper hand.


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