Daily Speculations
December 2003
Vic (12/10/3): Inspired by Mahan, Gary Becker's paper, "Restaurant Pricing," Journal of Political Economy 98 (October 1991), and baseball's influence on markets, I've been studying influence theories. Becker's thesis is that restaurants and rock concerts price things low because people get pleasure from watching or dining on something that everyone's talking about. It affords an "affiliation good," which is good for conversations and mingling.
Since demand increases with quantity watched, there is a bandwagon effect, and fads develop.
This would explain why Nasdaq going up becomes bullish and down bearish, as people talk and mingle and gain status.
Becker places much emphasizes on human capital, the value of education, and on-the-job training. He explains the decisions to marry and work on go to school as functions of these factors. We should take human capital into account when we talk about how bereft the U.S. is in manufacturing. This leads me to study influence theories. I came across some new 1990s concepts such as social judgment theory, which depends on latitudes. The person's preferred position is the anchor. Then the person's judgment changes based on various quantum latitudes of acceptance, rejection and non-commitment.
Some key concepts: What is most acceptable, the latitude of acceptance. The latitude of indifference is whatever. The latitude of most unacceptable is the latitude of rejection.
Two other interesting theories of change are the elaboration likelihood model and the theory of reasoned action. For reasoned actions, "We develop attitudes toward behavior and understand norms through learning." For elaboration likelihood latitude change depends on contents of persuasive communications. Googling under "social influence" got me a nice paper on the old-fashioned cognitive dissonance theory that the Festinger-Keech-Abelson cult engendered and led to these modern concepts which would seem to have many areas of research potential for predicting individual stock and market behavior.
George Zachar
(12/10/3):
Literally stumbled across this relevant
trailhead last night:
The Society for Judgment and Decision Making
http://www.sjdm.org/related-links.shtml
Tom Printon (12/10/3):
Just finished reading "Influence-The
Psychology of Persuasion" by Robert Cialdini. Highlights many of the themes you
write about. (e.g.festinger keech).
The basic idea presented in this book that our lives are often governed by
fixed-action patterns ("click-whirr behavior", as they're often called in this
book). It is so because in most cases it's advantageous (e.g., the fact that we
like people that like us, that we reciprocate favors etc.). However those
fixed-action patterns can be used by other people to influence us and take
advantage of us. The book explains different kinds of fixed-action patterns, how
they work, how they are used against us and what can we do to protect ourselves
from being abused.
Chapters on reciprocation, commitment and consistency, social proof, liking,
authority, and scarcity. Found the chapter on social proof especially
interesting. The basic premise: we do what other people do. It's usually
advantageous to just follow other people (especially if they are similar to us)
instead of trying to figure out what the correct behavior is. We can be
manipulated by
fake social proof. Examples: Canned laughter in TV shows. Claquinq (a very old
institution). Bartenders filling tip jars. Homicide in NYC (when no-one called
the police even it was obvious that police should be called, because other
people didn't do it). Increased likelihood of suicide/deadly accidents after a
publicized suicide/other deadly accident (Werther effect - suicides after
publishing "The Sorrows of Young Werther"). One jay-walker almost always
triggers a following. Buffalo hunt. Sales tactics: Users testimonies or citing
awards given to a product (i.e., "look, other people like it so it's good",
"fastest-growing" product). Artificial, long waiting lines outside disco clubs.
Experiments: Fighting fear of dogs (or fear of social contacts) in children by
showing them videos of children playing with dogs or making social contacts. A
person simulating a heart-attack was helped 85% if there was only one bystander
and
only 31% if there were 5 bystanders. Wallet experiments (a wallet with or
without a note, note made by a person who was/wasn't like us).
All in all, I would recommend this book.
Vic (12/10/4): The following is a very good post that we could all learn from.
K.D.
(12/10/4) on the counting list, in the context of influence theories, i.e.
cognitive dissonance, social influence, social judgment theory,
elaboration likelihood model, theory of reasoned action (a condensed cheat sheet
can be found here: http://oregonstate.edu/instruct/comm321/gwalker/influence.htm),
there
was a recent post on whether it takes more courage to build up than to tear
down; why certain people gravitate toward the sellers of fear & loathing, & why
still others abhor the modern pressures induced by the "tyranny of the positive"
- not my phrase, unfortunately.
Considering the above I was reminded
of the concept & role of the defensive pessimist. Some people find it easier to
manage the stress of living by first imagining the worst, then working
backwards. (I plead guilty) Others find this approach repulsive. Psychologists
who look into these things have apparently found that both groups are able to
achieve peak performance within their own strategy, but unable to do so with the
other's strategy. This is supposed to be true across occupations. However, I
wonder if speculators as a group fall into one category more often than the
other? Is one coping strategy more helpful than another in this business?
Also, if one is unsure whether one prefers the bright side or the comfort of
disaster, here is a link to a quiz that might help: http://www.wellesley.edu/Psychology/Norem/Quiz/quiz.html
Russell D Sears:
It seems to me that the "feel
good" influence, is typically sought out by the individual being influenced. We
generally want assurance that our decision was correct. This especially occurs
in subjective decisions such as taste. As Vic said, people like to eat at
popular restaurants, go to sold out concerts etc. Few have the conviction to
champion an undiscovered talent/master/genius. However, this is of course where
the profits are, nurturing ingenuity.
Further, it seems to me that the "misery loves company" influence, is typically
recruited by those already miserable. Yesterday, I had to explain to my smart,
perky 4th grade daughter, why she was such a target for these people. Some
people simply can't stand to see others succeed. However, often rather than
seeing such tearing down people, as salesmen trying to recruit , we often fall
victim to their sales pitch. Why is it that some people are very good at this?
What nerve or need do they attach too in us, that lets them bring us down with
them?
What distinguishes the warning I consistently hear from grossly overweight, out
of shape people that my running will bring me a disability through my knees or
developing a bad back: from the motherly warning to look both ways before
running across the street? Is it only; one is clearly brought on by the jealous,
hater of capitalism and the other a kind reminder of the risk involved in any
decision?
Clearly many people are trying to sell you their misery and fear. Why does it
not take the same courage of conviction to run something down as it does to
raise something up? Why do we have so much tolerance for the Abelsons of the
world, consistently wrong with terrible advice, but find that the internet bulls
of the world should be tar and feathered and sent
to prison?
Russell D Sears:
Influence and Prey: (12/10/3)
It occurred to me that one of the reasons investors allows the unjustified influence of the pessimist is that they consider themselves prey, instead of predator. Perhaps, many investors are prey. They need to stay in the herd. The pessimist remind them what could happen if they stray.
Asking the right question:
We as speculators, think all other investors are asking the same question, "how
to make the best return?"
The pension fund manager is first asking, a prey question. How would I
personally get killed? What would happen to me if leave the herd, and fall
behind?. Regulators, lawsuits and personal liability. I would suggest that the
belief in the efficient market theory does not drive indexing, So much as
pension plans index, because it is so hard to disprove the efficient market
theory therefore supplies a good hiding place.
And similarly the fund manager asks, "how do I keep from getting fired?" The
answer, is of course not to be the slowest in the herd, or the quickest either.
TA's evidence only being good in hindsight:
From a predator's prospective this is damning enough to reject it, since it does
not help raise returns. However, I would suggest from a pension plan and fund
manager, a preys prospective, this is a hearty recommendation. For they will
only be judged in hindsight. He imagines what would happen to him while he is
standing trial, either literally in court, or in his
bosses office and is shown a clear TA formations. While it may be after the
fact, this will hold little muster with the jury, who will be shown something
even they can understand, and will have expert TA's testifying to its wide
acceptance and validity.
How many times have you heard recently a TA say, "I would have got you out of
Enron, WorldCom, QQQ etc, at X"? The prey understands this to mean, "I could
save your job". Not, "this system will get you better returns."
As the horse bettor says, "embrace losses:"
It appears the predator can get an edge over they prey, by not fearing losses,
but by taking advantage of the herd.
Counting evidence presented already:
Jon Markman's and the drops versus adds to the S&P index.
The high VIX as a signal to buy.
Vic's comment yesterday on S&P crossing
the 10-day moving average.
All of these show a tendency to be overbought or oversold, due to the fear
of leaving the herd and becoming prey.
Counting to be done:
My hypothesis is that in times of crisis and panic many revert to tea leaves and
TA. Further, TA gains converts after the market crash. My TA knowledge is slim,
do any of you have a good way to count this and insights to profits? This is my
theory of, as Mr. e put it, "when to use TA", against the prey.
Now how to count it?