No registration required! (Why?)

Irrationality


came across a very interesting paper regarding human irrationality and self-defeating behaviors.

http://www.cepr.org/meets/wkcn/3/3503/papers/Baumeister.pdf

do be advised that the paper does have a very 'special' formatting quirk - every 10-12 words, two words will be joined. so every line or so, you'll see something likethis. just wanted to give a heads up.

enjoy!

Cool paper - thanks omni.

This part was good:

quote:
To test this theory, we set up experiments in which people had to choose between two lotteries. One of them involved playing it safe: The person was told he would have a 70% chance of winning $2, which our students do appreciate but is clearly not very
much money. The other lottery was a long shot: a 2% chance of winning $25, which is quite a bitmore money. In both cases, if they lost, they would have to be subjected to stressful noise. If you calculate the expected gain, the two dollar lottery was the correct, rational choice, with an expected gain of $1.40 as compared with only a 50 cent expected gain for the long shot. The noise would make that difference even bigger.
We put people into various emotional states, using a variety of strong procedures (see Leith & Baumeister, 1996). We found repeatedly thatmost people would make the correct choice of the two dollar lottery. This was especially common among people in neutral moods and in good moods. But people who were upset strongly tended to make the foolish, risky choice ofthe long shot. Thus, emotional distress produced a tendency to take stupid risks.

glad you liked it DT. i really thought it offered a lot of potential insight into common trading behaviors.

for example, i never thought of the decision making skill as a muscle, one that takes time to develop, can get fatigued, has a finite level of energy, and is a depletable resource. you constantly make important decisions throughout the trading day. experienced traders (i.e. JP) have spent years 'exercising' their decision making 'muscle'. they have bulked up so that they can 'workout' with an entire trading day and be okay. newbies, on the other hand, may very well be running on fumes after only an hour or two. maybe even less if they are generally decision-averse.

anyway, i really thought there was some fascinating descriptions of behavioral tendencies.

hth
quote:
Originally posted by omni72

...experienced traders (i.e. JP) have spent years 'exercising' their decision making 'muscle'. they have bulked up so that they can 'workout' with an entire trading day and be okay. newbies, on the other hand, may very well be running on fumes after only an hour or two...
I'm not so sure that it is having 'bulked up' but rather that they are making fewer decisions and actually thinking less once they become experienced. The experienced traders probably use a lot less of their mental capacity and energy than new traders because they don't have to. A lot of what they do is mechanical (driving a car analogy) and automatic and they give no thought to it while a newbie is trying to work out how to use the trading platform at the same time as making a trading decision and also watch the charts.

An experienced trader will know what he will do, where he will do it and why he is going to do it way ahead of the trade he enters. The newbie is still trying to work out what to do, where and why. So the newbie is using the grey matter while the seasoned trader has already used his mental energy years ago to get to this state and is now freewheeling...

The summary:
quote:
1. Under emotional distress, people shift toward favoring high-risk, high-payoff options, even if these are objectively poor choices. This appears based on a failure to think things through, caused by the emotional distress.
2. When self-esteem is threatened, people become upset and lose their capacity to regulate themselves. In particular, people who hold a high opinion of themselves often get quite upset in response to a blow to their pride, and the rush to prove something great about themselves overrides their normal and rational way of dealing with life.
3. Self-regulation is required for many forms of self-interested behavior. When self-regulation fails, people may become self-defeating in various ways, such as taking immediate pleasures instead of delayed rewards. Self-regulation appears to depend on a limited resources that operates like strength or energy, and so people can only regulate themselves to a limited extent.
4. Making choices and decisions depletes this same resource. Once the resource is depleted, such as after making a series of important decisions, the self becomes tired and depleted, and its subsequent decisions may well be costly or foolish.
5. The need to belong is a central feature of human motivation,and when this need is thwarted such as by interpersonal rejection, the human being somehow ceases to function properly. Irrational and self-defeating acts become more common in the wake of rejection.

i converted the original PDF into a DOC and cleaned up some of the word-spacing. it was verydistracting tome
and i felt (still do) that this paper presents a very empowering idea.

enjoy!

Click link to access uploaded file:
psychirrationality.doc
Thanks omni - that's much appreciated.

Just reading the summary and the parts that I put in bold is a great start to improving based on the conclusions of the study but understanding why those conclusions were reached is also very important.

I have noticed that the old axiom "make your hobby your business", although slightly off at an angle on this subject, is still very important. If you're doing something that you really enjoy and would do it even if you weren't paid for it, then you are far more likely to succeed if you every had a chance.
Not sure if "make your hobby your business" was the right phrase to use back there because I just did a quick search on Google with that phrase and it came up with 20 sites most of which were get-rich-quick type of sites.
dt -

i agree. what is odd is how many treat their trading business as a hobby, instead of the other way around. i fully realize that trading comes with some dynamics not found in most other hobbies or businesses (namely, the nearly infinite level of income a single person can generate).

i think people too often get too easily distracted with trying to Earn when they may see richer rewards by LEarn-ing to trade. for example, i see now that in my early stages, i traded too big, especially on an 'educational' account. regardless of my account size, i am certain i would have progressed more smoothly and with less damage had i simply committed to trading minimum size throughout my initial learning process. the problem was that i never truly accepted what i was doing as 'educational'. my bad


onward and upward


thx, as always, for your comments and contributions DT


edit: hey, i think the "hobby to business" approach is applicable and important. those sites don't use that slant by accident. it is what people want to do. they have just combined it with the GRQ desire. reminds me of a Seinfeld in which George combined eating food and having sex ... reached a point where a ham on rye made him horny (or something to that effect). same idea though
I don't think I saw that episode of Seinfeld but I always try and catch the repeats so it will strike a chord when I do see it.

I still want to turn the learning of futures trading into an arcade style game. I don't recall if I mentioned it here (I'm sure I did) that the way that I became so fast and good at touch typing was because my touch typing programming had a space invaders style game with it.

It dropped down collections of letters that I was learning to type and I had to type them out and then a bullet would launch from the bottom and splat out the letters. Great fun and addictive and best of all I was practising my touch typing all the time because I couldn't look at the keyboard when the letters were coming that fast.

So back to practise trading. If you have playback software like eSignal which also allows you to enter paper trades during the playback session then you can practise your trading at different speeds. There are all sorts of inherent problems with the eSignal software and this approach.

For example, I found that I would see the signal but if my playback was at 60x then by the time I hit the buy/sell order it was way past the signal and my fill was unrealistic so I couldn't really use it for trading.

Still, I hold out hope that I will be able to develop or find something like this.

On the other hand...

An automated system would have zero delay during playback...
a couple of (reality-limited) options are:

1. download and install the Ninja Trader with simulated data feed. you can't use charts with it (as far as i understand it anyway) but you can practice order placement, stop placement, exits, DOM reading and so forth.

2. i used to have a lil app (i think it was called MarketMaster) that let you use historical data to 'replay' a day and put in your orders (stops, limits, etc) as the day progressed. downside was that it was not real-time; you either manually advanced each bar (regardless of the timeframe) or you could play it forward until your next order was hit. one kind of cool aspect was building out your orders in advance.

but, yeah, hey, i'm all for you creating a realistic practice trading game, complete with real-time simulated data stream, charting, DOM, advanced order placement options, and other stuff


i'll help beta test it. heck, i'll even help alpha test it


but seriously, i have always thought it would be a great benefit to create something like that. i figure if it works for NASA and US Air Force and other groups, it would be useful for traders as well.

keep up posted on it if you start developing such an app.

Is this Blair Hull from Matlock Capital? www.matcap.com ?

That's a good quote by the way.

I couldn't get to sleep last night and so I rummaged through the library and found an Anthony Robinson book that I have read the first few pages of (Awaken the Giant Within) and have always intended to read but just not got to it.

I flipped through a few chapters and came across a section called the Alpo Diet. Apparently Alpo is a brand of dog food. The story goes on to tell of a couple of women who had failed every diet and finally succeeded when they committed to eating a can of this dog food if they strayed from the diet. Whenever they thought about eating something not on their diet plan or giving up on it they'd pick up this can and read the ingredients which included chunks of horse meat. Apparently the diet worked.

So coming back to what pt_emini quoted Blair Hull saying, we need the discipline and if we do not have the discipline then we need something to trap/force/cajole us into a disciplined mindset. One from which we won't stray.

I know that I've discussed this before but I feel that a paper trading system could be made far more effective if you could associate some sort of punishment with any break of discipline or rules in the paper/practise trading. I've often joked about wiring the trader up and shocking them which is obviously not practical and dangerous.

Perhaps a timeout chair/corner. I you break discipline you commit yourself to this chair and meditate over what you did and why you did it.

Unfortunately there's nothing forcing you into that corner. No big stick waving over your head and no dog food to eat...