Winning with Advanced Market, Trading, and Risk Psychology
by ilene - October 22nd, 2009 8:39 pm
Winning with Advanced Market, Trading, and Risk Psychology
Courtesy of Damien Hoffman at The Wall St. Cheat Sheet
This is a guest post by Denise Shull from TraderPsyches.
In order to really understand either what went wrong in the credit housing bubble or to improve institutional or individual risk management processes, one really needs to take a step back and rethink their thinking. We tend to believe that we know how we think or even worse, that we know the best way to think (after all didn’t we go to college to learn to think?) but given the advances in brain science in the past decade it is clear that we really don’t know how it is we think.
Thinking is germane to analysis and decisions and in turn confidence and beliefs are germane to implementing a decision. I still can think of no better way to say it than Colin Camerer of Cal-Tech and his co-authors Lowenstein and Prelec when they said “It is NOT ENOUGH (emphasis mine) to know what SHOULD be done, one must also FEEL it.” Well invert that and you get that all doing has a feeling associated with it.
Now Damasio and Bechara showed us this from The University of Iowa and USC starting in the early 1990’s but word really hasn’t hit Wall Street (or Washington either btw). Behavioral finance observations confirm that we indeed feel better when we rely purely on mathematical formulas but the real world doesn’t always fit into an equation.
And guess what – our brains (particularly on risk) know it! On the majority of days, it works fine to do it the old way. But doing well in the middle isn’t what makes you the real money or saves you from the black swans – that requires knowing what to do when things DO NOT go according to plan.
The solution lies in using our “maths” within the context of consciousness about the foundational and relevant qualitative data. Our brains are good at pattern recognition – call it implicit learning or intuition – it is the same. The problem is we don’t value that data – partially because we don’ t know how. In fact not all that long ago it wasn’t blink and Malcolm Gladwell getting $100K to talk about
…
Facebook
Twitter
LinkedIn 
del.icio.us
DiggIs a Mini-Bubble Brewing?
by ilene - August 15th, 2009 7:00 pm
Click here for a FREE, 90-day trial subscription to our PSW Report!
Is a Mini-Bubble Brewing?
Courtesy of Damien Hoffman at Wall St. Cheat Sheet
The markets are both fundamental and psychological. On the fundamental front, the economy is in horrible shape but the Fed may have printed enough money to avoid The Great Depression 2. However, on the psychological side I smell fear in the bear camp as markets keep moving higher.
Fear is an interesting emotion because it works both sides of the market. Obviously, on the downside fear leads to panic selling and oversold markets. However, on the upside, fear causes chasing by those who feel they are being left behind. I worry that if the markets continue to hold support and subsequently expand higher, a mini-frenzy may ensue to blow a mini-bubble.
The mechanics of such an event look like the following:
1) The market increases in value.
2) Money managers are forced to overrule their fundamental analysis and buy equities because managers are judged against the (rising) indices. This is commonly referred to as “performance anxiety.”
3) Individual investors are forced to overrule what they see economically in their community because they must make some money back (especially the Boomers and retirees) like the charlatans on TV claim they have been doing.
Therefore, you have two strong waves of future buyers slowly giving in to fear. Just like on the way down, as fear spreads the feedback loop simply feeds on itself to perpetuate rising markets.
Market psychology expert Denise Shull at Trader Psyches explains, “Brain and behavioral research, as well as our first-hand coaching experience, shows that the fear of ‘missing out’ is more compelling that the possibility of reward. In reality, this tendency drives all bubbles.”
Although the variables above have already been pushing the market higher, there are still a lot of burned investors missing the ride (a roughly 50% ride off the S&P 500 bottom, I might add). In the current market I have seen sentiments shift from hating stocks because they are down, to hating stocks because the move up was missed. On a weekly basis, I’m getting more fear-based emails and inquiries about whether it’s time to “jump in.”
If, and that’s a big if, the fear spreads to pandemic proportions, we could watch the markets go vertical as the great chase…
German
Spanish
French
Italian
Portuguese
Japanese
Korean
Russian
Chinese
Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
(
