The #Bitcoin Bubble Is Caused By The Halo Effect

One of the causes of the Bitcoin bubble is a cognitive bias known as the Halo Effect. I will explain how this works and how it is going to prove very expensive for holders of Bitcoin

The Halo Effect occurs when people judge the overall quality of an item or person by considering only a single property of that item.  This can lead to dramatic errors; most obviously when all of the other qualities of the item  are negative or highly questionable.  This I will argue here is one causal factor among several which have caused novice investors to buy Bitcoin.  When it crashes, they will lose all of their money.  They will be unable to exit the market because the power of the cognitive bias is too strong.

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In this post, I will briefly set out the cognitive biases which are in play here before describing the Halo Effect and how it is another feature of human psychology which leads people to mistakenly buy Bitcoin.

The Halo Effect is not the only causal factor operative among the novice investors who are buying Bitcoin.  I have already argued:

https://timlshort.com/2017/12/17/the-anecdotal-fallacy-and-the-bitcoin-bubble/

— that another causal element is that Bitcoin buyers prefer their own experiences to any consideration of statistical data.

In addition, Bitcoin buyers share with Trump voters a distrust of experts, as I argued here:

https://timlshort.com/2017/12/18/the-forthcoming-bitcoin-crash-will-kill-the-trump-demographic/

We can see that as a two variants of the Dunning Kruger effect.  Here, people who lack competence are unable to detect such lack of competence. This makes intuitive sense since people who lack competence and are aware of it would presumably either take steps to address that lack or avoid activity requiring the relevant competence.

A corollary of that is seen in another variant of the Dunning Kruger effect: people are unable to detect true expertise.  We can see this when:

https://timlshort.com/2017/09/16/bad-arguments-for-the-permanence-of-bitcoin/

— someone is able to publish a book on Bitcoin when it is quite apparent that they do not have even a basic understanding of it.  For readers of this book, it must be impossible to recognise and benefit from well sourced, properly constructed arguments, for example in the mainstream media.

I turn now to the Halo Effect.  This was first seen in data about personality assessment in the military.  It was found that officers asked to rate their subordinates would in fact rely on a single criterion, and then assume that all other  relevant factors were correlated with that one criterion.  This is obviously dramatically false unless all of the other variables are correlated with the one assessed.  And that is highly unlikely to be true.

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Many people are unable to distinguish Bitcoin from the blockchain.  This leads many of the novice investors who are buying Bitcoin to fail to distinguish between the two claims “I am buying Bitcoin” and “I am investing in blockchain technology.”

The blockchain is a distributed ledger system which offers transparent recording of transactions (or any data) without the backing of any central authority.  It is an extremely interesting technology which holds great promise.  It could, for example, be used to create corruption-resistant property ledgers.  That would be of great benefit, not least in combatting money laundering.

Bitcoin is termed a “cryptocurrency” even though it does not fulfil the roles of a currency in that it is not readily convertible and it is not a stable store of value.  It is used to reward the miners who maintain the blockchain on a widely dispersed set of servers.  However, it is clear that the blockchain and Bitcoin are not identical.

An objection has been attempted here by a Bitcoin proponent that it is not possible to have a blockchain without a cryptocurrency.  There are a number of readings of that, but on the obvious two, the claim is either false, or true but misleading.  If the claim is read as “you cannot run blockchain code without also generating a cryptocurrency” then it is false.  There is no reason why the blockchain code could not be run with the cryptocurrency elements redacted.

If the claim is read as “it is necessary to compensate the miners, ” then it is true.   However, the miners could be paid in $.  Or the blockchain could run in the cloud, or in many clouds.  That would carry some costs, but this is not a problem.  It would even be possible to compensate the miners in a cryptocurrency which was pegged against the $.  There is no need for the cryptocurrency to appreciate and definitely not to gyrate wildly.  I therefore conclude that the objection fails.

There is one positive property that Bitcoin possesses.  It is true that it is generated using the blockchain technology.  It is also true that the blockchain technology is extremely interesting, and being pursued widely by a number of serious players.  By contrast, no professional, experienced or institutional investor is holding Bitcoin.  Novice investors fall prey to the Halo Effect when they think that the one positive quality of Bitcoin is a measure of its overall quality, when in fact it has no other redeeming features at all.  This will prove to be a very expensive cognitive bias when the Bitcoin crash comes.

See Also:

The Late Evaluation Effect And Financial Markets

The Forthcoming #Bitcoin Crash Will Kill The #Trump Demographic

The #Anecdotal Fallacy And The #Bitcoin Bubble

Bad Arguments for the Permanence of Bitcoin

 

The Forthcoming #Bitcoin Crash Will Kill The #Trump Demographic

One common feature shared by both groups is distrust of experts

We know that if you voted for Trump, you are more likely to be less intelligent, less educated, poorer and more rural.  I will argue that this leads to a further feature — distrust of experts — which is required to be a supported of either Trump or Bitcoin.  This suggests that when Bitcoin crashes, Trump voters will experience most of the losses.  In this post, I will consider only the distrust of experts feature.

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Note that I said “more likely to be []…”  We are talking about two curves here.  It is not certain that you are less intelligent and poorer etc.  It would not be an objection here to say “I have a PhD and I am rich and I voted for Trump.”  To say that would be to commit the Anecdotal Fallacy, which I argued yesterday:

https://timlshort.com/2017/12/17/the-anecdotal-fallacy-and-the-bitcoin-bubble/

— is also a major feature of the Bitcoin bubble.

One of the notable points about Bitcoin is that there are no professional, experienced or institutional investors who have invested in Bitcoin.  (If that changes, we should all become seriously concerned.). Everyone who holds Bitcoin is an inexperienced amateur.  I put this to a Bitcoin enthusiast, and received the following reply.

Mark Cuban invested big into Unikorn. Peter Thiel invested into bitpay which is a wallet company. Mike Novogratz (former president of fortress investments and partner at Goldman Sachs) runs Galaxy Investments (almost exclusively crypto). Tim Draper bought 30,000 btc in 2014.  And Bill Gates: there are no definitive articles on how much BTC he holds but he has plenty of quotes talking about how it’s the future

I will now show why none of that works.

Mark Cuban and Unikorn

The first point to make here is that it is odd to cite Cuban here since he is on record as saying that Bitcoin is a bubble.  The other problem is that Unikoin, the token involved in this ICO, is not Bitcoin.  (I also believe that almost all of the other ICOs are fraudulent, but I would need a lot more space and time to show that.)  Finally, Unikoin will apparently permit sports betting, so while I do not recommend that, it at least has a theoretical source of value.  Bitcoin does not.

Novogratz and Galaxy Investments

Novogratz and Galaxy Investment Partners have invested into the huge and under the radar Worldwide Asset eXchange (WAX).  This is like selling shovels to miners in the Klondike gold rush.  (Reportedly, Trump’s grandfather ran a Klondike brothel.)  Selling shovels is a great business to be in, irrespective of how many of the miners or Bitcoin holders go bust.  So this again is not an example of a major investor holding Bitcoin.

Tim Draper and 30,000 btc

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This is the only one of the examples which approaches being serious.  We must take it seriously because Draper reportedly invested serious money: $18m.  And he is actually holding Bitcoin as opposed to backing exchanges.  The caveats though are manifold.  First, he lost 40,000 Bitcoin in the Mt Gox fraud, and the fact that this did not give him pause makes me think he is an esoteric thinker.  Secondly, a lot of his remarks concern enthusiasm “for the technology”.  It is very important to keep a clear distinction between Bitcoin — a Ponzi scheme — and the block chain — a very interesting technology.  Thirdly, this is one man against every investment bank, hedge fund, regulator and all the other expert investors in the world.

I have in fact been told that my 20 year experience of successful investing is a disadvantage, because it means I am unable to understand the “glorious opportunity” allegedly represented by Bitcoin.  There are in fact some advantages to disadvantages, as I argue in my new book:

— but that isn’t one of them.

Bill Gates and the future

This is an excellent example of muddled analysis and poor understanding of the importance of precision and sourcing one’s quotes from reputable sources.  (It is no coincidence that Bitcoin supporters and Trump voters alike disparage proper news sources like the New York Times and prefer websites with manufactured quotes.)  We are not actually given a quote from Gates which is the first problem.  But secondly, it is highly likely that Gates thinks the blockchain is the (part of) the future and is not holding any sizeable numbers of Bitcoin.  A distributed transparent ledger, which is what the blockchain is, is indeed a highly interesting piece of technology which would have many very useful applications.  As just one example, imagine replacing property registers with blockchain.  Myriad opportunities for money laundering and corruption would disappear, and be replaced with an efficient technology. The fact that Bitcoin is also built on the blockchain is irrelevant.

People in this country have had enough of experts

This is actually a quotation from a pro-Brexit politician, but we see the same pattern across the Brexit “debate,” in Trump vs Clinton, in global warming and in MMR Vaccine/autism.  In each case, you need to believe that you are right and anyone educated or with specialist knowledge is wrong.  You also need to believe that those people are lying to you — for no obvious reason.

The quality of the arguments raised by Bitcoin proponents can be seen to be extremely poor.  I discussed here:

https://timlshort.com/2017/09/16/bad-arguments-for-the-permanence-of-bitcoin/

— some really bad arguments.  What is remarkable here though is not the quality of the arguments — they are all very poor — but that this is someone who has somehow managed to publish a book on Bitcoin while clearly not understanding it at all.

So now you can decide.  If you invest in Bitcoin, you are lining up with the people who mistrust experts.  If you voted Trump, you did the same thing, because you are probably a climate change denier.  So I think there is a very strong likelihood that many Trump voters are also holding Bitcoin.  And they are going to pay a heavy price for both decisions.

See Also:

The #Bitcoin Bubble Is Caused By The Halo Effect

The #Anecdotal Fallacy And The #Bitcoin Bubble

Bad Arguments for the Permanence of Bitcoin

The Psychology of Successful Trading: see clip below of me explaining my new book!

 

 

The #Anecdotal Fallacy And The #Bitcoin Bubble

The Anecdotal Fallacy, wherein people privilege their own experience over statistics, is one of the many cognitive biases that infect our thinking. It is particularly dangerous in financial markets, as illustrated by the current bubble in Bitcoin

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The Anecdotal Fallacy occurs when people ignore statistics and quote a story of events that happened to them.  Often, it will turn out not to have even happened to them, but to “someone they know.”  While this latter step is an additional move away from constituting useful data, it is not the most malign effect of this bias.  The main problem is that assessing probabilities on the basis of personal experiences is almost completely useless even when those personal experiences actually occurred.

There is only one way to assess probabilities, and that is to use statistics of similar event frequencies.  This is extremely hard.  In fact, even understanding it when it has been competently done by scientists or statisticians is extremely hard.  It needs a lot of training and it seems as though our psychology is almost designed to trip us up.

The Anecdotal Fallacy is extraordinary widespread.  It’s use seems in many circumstances to be almost automatic.  If you give anyone any data on anything at all, people will generally respond with what they think is a counterargument from their own experience.  Apparently intelligent and successful people fall into this error, so those qualities are not a prophylactic here.  For example, Rupert Murdoch recently tweeted a photo accompanied by the text: “Just flying over N Atlantic 300 miles of ice. Global warming!”

This is a fairly extreme example which may have been deliberately provocative, but in my view it is just quite stupid.  The ideas that global warming has to have happened already in all locations and that it would eliminate all ice on the planet betray a non-existent understanding of the problem.  The only way to assess the probability that global warming is a genuine threat is to look at graphs showing correlations between greenhouse gas concentrations and temperature rises over several decades.*  A personal experience is simply irrelevant to that task.

We also tend to over-estimate the probability of vivid events.  I see this as an aspect of the Availability Heuristic, which I think is related to the Anecdotal Fallacy.  We use the Availability Heuristic when we assess the probability of events by considering how difficult it is to think of an example of that type of event.  Obviously we will make systematic errors in probability judgment if some events are easier to recall than others, and more vivid events are more easy to recall.  I discuss this aspect of our psychology in the context of financial markets in my new book:

 

Why is the Anecdotal Fallacy relevant to the Bitcoin bubble?

Because everyone who is buying Bitcoin is doing so based on one of two events.  Either they themselves have recently made a large amount of money from buying it or someone they know has.  Twitter is full of stories of people doing so.  This is extremely vivid and alluring.  It draws more people in, which of course is what helps to sustain the bubble and indeed any Ponzi scheme.

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Note that the problem is not that these stories are false.  A lot of people have indeed made a lot of money out of Bitcoin.  However, it is still a terrible investment — in fact, I don’t think we can even call it an investment — because it has no fundamental value and can crash to zero at any moment.  It will definitely do so; we just don’t know when.  So the problem is rather that people are using the Anecdotal Fallacy to assess the probability that Bitcoin will rise forever.  They do not consider the statistics on bubble which  have occurred widely throughout financial history.  Any “asset” which rises this quickly has been a bubble which has eventually crashed to zero value.  It will do so as quickly as it ascended.

So the statistics are diametrically opposed to our psychology here.  Stay away from Bitcoin at all costs.

 

*The reason I say “several decades” is because we have only been taking detailed measurements for about 150 years.  However, we have enough data from ice cores etc going back much, much further, just with bigger error bars.

See also:

The #Bitcoin Bubble Is Caused By The Halo Effect

Bad Arguments for the Permanence of Bitcoin

The Forthcoming #Bitcoin Crash Will Kill The #Trump Demographic

The Psychology of Successful Trading: see clip below of me explaining my new book!

#Brexit Is A Disaster, But @DavidDavisMP Is Right About The 57 Documents

Attacking SecState DEXEU by using an easily foiled challenge does not aid the cause of those seeking soft or no Brexit. I will outline why the HMG position on the 57 documents is coherent and plausible, contrary to widespread opinion

Everyone seems to be struggling with the government’s stated position on these documents, claiming that there have been obvious inconsistencies.  I will argue that on this sole point, there have been no inconsistencies and in fact, the position of HMG is economically correct.

By “everyone,” I mean the Financial Times and noted QCs as well as the entire Twitter commentariat.  So that really is everyone.

The general position seems to be something approximating to the following. “Davis said HMG had done a lot of work (“57 documents”) on the economic impact of Brexit but then when he was asked to provide it, changed his position to the diametrically opposed one of “there are no documents.” ”  If he had said that, he would clearly be inconsistent and incompetent.  But, he did not say that.

The key to this is understanding the formal definition of an Impact Assessment.  According to Davis (and which I accept):

An Impact Assessment must include a “quantitative forecast of economic outcome”

This means that for an Impact Assessment to have been produced, a team of economists and sector experts has produced a complicated spreadsheet modelling cashflows.  Efforts have been made to see what the effect of tariffs on a particular sector would be.  Finally, and critically, assumptions have been made as to exactly what percentage of trade will be lost, to what extent this will be offset by other factors, and what the levels of various key parameters will be, such as GDP growth in the UK and the EU, CPI in various locations, and the level of employment and the flexibility of workers.  If a document does not have such a “quantitative forecast of economic outcome,” it is not an Impact Assessment.

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Davis admits that no Impact Assessments have been made.  There has been, though, a great deal of assessment of the economic impact of Brexit.  These are the 57 documents.  Note also that these documents can have detailed numerical underpinning but still not meet the formal definition of being an Impact Assessment.  Just because something considers the impact of Brexit economically does not make it an Impact Assessment.  We see this when Davis says that the fact that a document contains the word impact is not sufficient to make it an Impact Assessment.

Should HMG do Impact Assessments?  No.  They are, again as Davis says, of limited value.  This is because we have little idea of what CPI or GDP are next year, and we have absolutely no idea over the 30 year horizon of relevance here.   I discuss such difficulties of forecasting in a precise way in my new book (see for example pp. 79-80):

https://timlshort.com/the-psychology-of-successful-trading-behavioural-strategies-for-profitability/

So, it is now clear that there is no inconsistency in the position taken by SecState DEXEU and it is in fact economically appropriate.

See Also:

Jacob Rees Mogg Is Wrong To Say That Loss of Passporting Will Not Be A Problem For The City

The Psychology of Successful Trading: see clip below of me explaining my new book!

Where To Cut UK Government Spending: An Alternative Approach

UK Government Spending: Where It Needs To Be Cut And Why

 

The Picture Superiority Effect And Financial Markets

The Picture Superiority Effect is one of a large number of cognitive biases that affect how we think and act. It is important to know about these biases in the context of financial markets because they can impair our decision making but also inform traders on how other market participants may react

As in previous posts featuring on this blog, I will first outline a cognitive bias drawing from the relevant psychological literature and then describe how that plays out in financial markets.  My basic point throughout is that it is critical for market participants to know about these unavoidable biases for two reasons.  Firstly, knowing about them is the first step to being able to recognise when they are operative and assessing whether they have resulted in an optimal decision, with specific relevance here to trading decisions.  Secondly, since no-one is free of these biases, traders can expect that other market players will be influenced by them and trade accordingly.

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The Picture Superiority Effect is relatively straightforward.  What psychologists have found is that people find it easier to remember images than words.  There are different opinions in the literature as to why this might be.  In my view, the effect is likely to be explained by our preference for the vivid and concrete over the dull and abstract; but in fact, the causation is not that important for our purposes here.  We just need to know that everyone remembers imagery more than text.  This is probably no surprise; in particular in the age of social media, as pictures are shared more widely on social media than text (and so we might surmise that there is also a Video Superiority Effect which is even stronger).

There is some discussion as to how age interacts with the Picture Superiority Effect.  Early researchers found that younger people recalled more pictures than words while older subjects did not, suggesting that the Picture Superiority Effect exists only in younger people.  More recent work, however, appears to find the exact opposite.  Given the general improvement in experimental methodologies that occurs over time and the parallel increase in knowledge, I would say that the more recent studies are more likely to be correct.  But that observation remains subject to further confirmation/disconfirmation.

As a result, there have been some suggestions that what is happening is that images work as a compensation mechanism for older adults who are experiencing memory deficits.  So the overall story may be that younger people are prone to the Picture Superiority Effect, middle age adults are less prone to it, and then older people embrace the effect for compensation purposes.  This would mean something like older people are deliberately relying more on pictures to assist them in remembering things.  There is also advice from the intelligence community (!) to the effect that the way to remember a lot of items without writing them down is to modify a visual memory of a very familiar location, such as one’s home, and add to it strange and striking items which represent the data one wishes to remember.

All of this means that everyone who is involved in financial markets can expect that the Picture Superiority Effect will play a role in their thinking to a differing extent at various life stages.  How would this work?

This type of point — how do cognitive biases affect our performance in financial markets —  is one I discuss at length in my book:

https://www.routledge.com/The-Psychology-of-Successful-Trading-Behavioral-Strategies-for-Profitability/Short/p/book/9781138096288

One example I give there is related to imagery, although I am actually discussing a different cognitive bias called the Availability Heuristic.  The example is the photos and video with which we are all familiar of people who had been fired from Lehman Bros. after it collapsed in the crisis.  These pictures and ones like them are extremely easy to remember.  In fact, they are difficult to forget.  This sort of thing might make you unreasonably averse to buying bank shares.  Similarly, pictures of Elon Musk looking depressed might make you avoid TSLA stock.  There may or may not be good reasons for

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avoiding such stocks (my view is the opposite at present) — but what is 100% clear is that if you read a story about banks or TSLA and only recall a picture of a fired banker or a sad Elon Musk, you have not retained very much which is useful in terms of making a market decision.  Even if you give equal weight to the picture and the words, you are probably still weighting the evidential value of the total information value available to you wrongly.

It is probably wise to set aside the limited information value represented by imagery and focus on the data — which may of course be presented graphically without being just a photo.

See Also:

The Illusory Truth Effect And Financial Markets

The Late Evaluation Effect And Financial Markets

Is Experience Time the same as Experienced Time?

The Psychology of Successful Trading: see clip below of me explaining my new book!

 

 

Negativity Bias And Financial Markets

Negativity Bias is one of the powerful and ineradicable aspects of human psychology, which has important effects on the performance of stock market investors

Negativity Bias is perhaps the most expensive and dangerous item in our psychological repertoire insofar as it impacts on our performance in financial markets.  In this post, I will outline the bias and then discuss how its effects play out in markets.

Negativity Bias is reflected in the finding that negative events affect us much more strongly than positive ones.  I should immediately distinguish this effect from the bias I was discussing in my previous post (https://timlshort.com/2017/11/05/attentional-bias-and-financial-markets/)  There, I discussed the subset of Attentional Biases that operate in people who are depressed or anxious, such that they pay more attention to mood congruent information.  Negativity Bias differs from that in that it affects everyone, irrespective of mood and psychiatric diagnosis.  Some forms of Attentional Bias do that as well, but in the previous post I considered only mood-related variants thereof.

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The bias can be seen as a mis-calibration, like many of our cognitive biases.  There is a “right-size” for the amount of impact that an event should have on us which is related to the “intensity” of that event.  Obviously, intensity is rather a slippery concept here, but we can give some meaning to it with illustrations.  Two negative events of different intensities would be stubbing one’s toe and breaking an arm.  Two positive events with differing intensities would be receiving a birthday card or falling in love.

So without Negativity Bias — and with what we might regard as a purely rational response to events — there would be a link between the intensity of an event and its impact upon us.  There would not be a link between whether the event  was positive or negative and the size of the impact of the event on us.  This does not mean that it is strange that we react negatively to negative events and positively to positive events (in fact, it would be very strange were this not so!).  What it means is that it is odd that we react more strongly to negative events than we do to positive events of the same intensity.

This was measured by experimental social psychologists in financial terms using sums of money.  It was found that the mis-calibration is very strong: the factor is about 2.5.  In other words, we react 2.5x as strongly to losing $10 as we do to gaining $10.  In other other words, losing something is much, much worse than gaining the same amount.

The Negativity Bias then will have huge impacts on our risk aversion, and that, it is well known, is a key driver of performance in financial markets.  Many people perform extremely badly as a result of excess risk aversion.  In the current environment, it is unwise to be holding substantial amounts of cash.  People should have some emergency funds of course.  But if CPI is running at 3% and interest rates paid by the banks are more like 1%, then anyone holding cash in the bank is basically prepared to pay 2% a year in order to avoid any risk, as they see it.

As I see it, paying to avoid risk like this is just concretising the risk.  You don’t gain: you just get the loss in a form you can pretend doesn’t exist.  It would be much better — and in fact less risky understood correctly — to invest in something.  There is an enormous spectrum of assets and geographies out there from equities in the US, Japan, Emerging

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Markets and Frontier Markets to bonds issues by governments, investment grade corporates and junk corporates.  There are thousands of ETFs available offering the widest imaginable range of exposures.  Overcome your Negativity Bias and pick one.

See Also:

 

The Illusory Truth Effect And Financial Markets

The Psychology of Successful Trading: see clip below of me explaining my new book!

The US Was Defeated In #Vietnam By Systematic Theory Of Mind Error

What Is “Theory Of Mind?”

 

 

 

 

Attentional Biases And Financial Markets

Attentional Biases are operative in everyone’s psychology; they can affect performance in financial markets because they control what information sources we consider

Are happy people better at picking up information that will make them happy?  Do sad people do the opposite?  Have you wondered how your mood can affect your behaviour

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in ways you don’t know about?  All of this is true and can be explained by considering one form of a Cognitive Bias called Attentional Bias.

We are subject to approximately 150 Cognitive Biases, at the last count.  All of them affect our thinking without us necessarily knowing too much about when they are at work or what the results are.  My project initially is to list and describe these mental subroutines before critically examining them and assessing how they work in a market environment.  The objective is to allow market participants to look out for the operation of Cognitive Biases in their own thinking and trade on the expectation that they will also figure prominently in the thinking of other players.

One of the most important Cognitive Biases is known as Attentional Bias.  It comes in several forms, but all of them have in common that they systematically slant which information we pay attention to.  Obviously this can be expected to have dramatic effects on thinking and market outcomes.  In this post, I will first describe Attentional Bias and then outline how it might play out in a market setting.

Much of the psychological literature on Attentional Bias looks at what we can term mood congruency.  The basic idea here is that we are more likely to look at information which fits our mood.  So, anxious subjects are more likely to look at anxiety-inducing information and depressed subjects are more likely to consider depressing information.  Clearly this is already rather unhelpful for such subjects, but my aims here are only to look at what this might do in markets.

This is widely important because generalised anxiety affects a significant proportion (estimated at between 5% and 30%) of the population.  This is people who are more-or-less anxious more-or-less all of the time. Since it is a significant  minority, it is likely that some of these subjects participate in financial markets, although it is possible that some anxious individuals will self-select out of stock markets.

Depression of sufficient gravity to merit a psychiatric diagnosis affects about 1% of the population; many more people will experience a less severe depression or a more episodic form.  Again, we can expect plenty of market participants to be depressed when trading.

Experimental investigations of mood-disorder linked Attentional Biases have focused on reaction time studies.  A pair of words was briefly presented to experimental subjects on a computer screen.  Sometimes, one of the words was replaced with a dot, which was the signal that a button should be pressed.  The time it took for subjects to press the button was recorded.  It would typically be in the range of several hundred milliseconds.

Sometimes, the other word presented on the other side of the screen to the dot was a threatening word.  The word could be socially threatening (‘humiliated’) or physically threatening (‘injury.’)  The experimenters found what is known in psychology as an RT spike — or a delay in reaction time.  People took longer to see and react to the dot if a threatening word appeared on the other side of the screen.  These effects were quite large.

Perhaps most interestingly, the RT spikes were larger for anxious or depressed subjects, especially if the threat word was specifically related to either anxiety or depression.

What Effects Of Attentional Bias Should Such Individuals Be Aware Of?

It is obvious that such effects could impair traders on a trading floor who are making rapid trade decisions themselves.  Information near their field of vision which is threatening — such as a negative Bloomberg headline — could grab the trader’s attention and cause a delay in response time even if it is unrelated to the trade under consideration at the time.

While this is a real issue, I want to consider non-professional traders as well. In general,

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day-trading is best avoided as 85% of day traders lose money.  (Day-trading is popular among people new to investing.  It is called that because the aim is to minimise risk by not holding any positions over-night.  However, the necessarily short-term nature of this approach means that one can really only benefit from ‘noise’ in stock movements and there is no way to rationally forecast noise.  Relying on luck is even worse in markets than elsewhere because the punishment is swift.) It is better to be a buy-and-hold investor.  What effects of Attentional Bias should such individuals be aware of?

If one is episodically depressed or anxious, then these are not times to be trading.  Negative mood-congruent information will grab attentional resources and make traders much more likely to exit positions.  This may or may not be the right decision to make; what is clear is that such a decision should be made rationally and with a fair and open consideration of the relevant data.  Often this will not be what everyone else is doing, so my approach lends itself naturally to a contrarian investment stance.  There are other good reasons to be a contrarian investor, including that it fits with a long-term approach — so it is not something much engaged in by day-traders.

If someone is permanently depressed or anxious, then treatment should be sought and one should abstain from trading until an improvement is seen.  If no such improvement can be achieved, then I am sympathetic, but I would suggest hiring financial advisers in that circumstance.  It would be one thing less to be concerned about and would likely have more optimal outcomes, despite the extra fees involved.

See Also:

What Is “Theory Of Mind?”

The Psychology of Successful Trading: see clip below of me explaining my new book!

The Late Evaluation Effect And Financial Markets

Sherlock Holmes as Enemy of Confirmation Bias