Hidden in plain sight.
Have you ever looked back at a chart and said to yourself, “why the hell did I trade that chart that way? Why didn’t I see what was really going on and join?”
We all have. That’s the reality of trading, to some degree. We have to accept some misalignment. The other fact of the matter is that I don’t believe an “edge” has to be complex of even perfect because of the massive amount of information humans tend to miss simply due to bias.
There is no need to race your competition when you can simply put a stick in their spokes
I don’t believe that people understand the degree they, and others, block out information because it makes them uncomfortable. This is why my actual “trading edge” is not complex nor does it consider many factors. The reality is, we don’t need to see everything to see what others don’t, what others can’t. What others won’t allow themselves to see.
It doesn’t stop there either. It’s not just that we omit certain information. The information we intake get’s processed subconsciously before it hits our conscious mind. We assume we are getting the “real data” but in fact, we are getting it through a bias filter.
The following is simple a block of text output by ChatGPT in a conversation about cognitive bias and how it effects our mental filter. I wanted to post it here in order to refer back to it in future posts. To take advantage of the following, read it and consider what things people may not see because of bias. Also consider what you might do to disengage from some of these biases. What ways can you disincentivize your mind from moving towards some of these bias’.
Trading is a daily battle between our rational minds and our own bias and impatience.
It seems like people are able to be fairly blind to these qualities in themselves. I wonder how they may have these qualities but not notice and what kinds of actions that might produce.
Response:
Indeed, the phenomenon you’ve highlighted is known as cognitive bias, where individuals exhibit systematic patterns of deviation from rationality in judgment and decision-making. People often have these qualities of risk aversion, loss aversion, and other biases without fully recognizing them. Several factors contribute to this phenomenon:
- Subconscious Processing: Many cognitive biases operate at a subconscious level, influencing individuals’ thoughts, perceptions, and behaviors without their awareness. These biases are ingrained in human cognition and can shape decision-making processes without conscious recognition.
- Selective Attention: Individuals may selectively attend to information that confirms their existing beliefs or biases while disregarding contradictory evidence. This selective attention can create a distorted perception of reality, leading individuals to overlook or downplay the influence of cognitive biases on their decision-making.
- Heuristics and Mental Shortcuts: Humans often rely on heuristics and mental shortcuts to simplify complex decision-making tasks and conserve cognitive resources. While these heuristics can be efficient, they can also lead to systematic errors and biases in judgment. Individuals may unknowingly apply these heuristics without recognizing their potential pitfalls.
- Social Influence: Social factors, such as peer pressure, groupthink, and conformity, can shape individuals’ perceptions and behaviors in subtle ways. People may conform to group norms or consensus opinions without critically evaluating the underlying rationale or considering alternative viewpoints.
- Emotional Influences: Emotions play a significant role in decision-making, influencing individuals’ risk perceptions, preferences, and choices. Emotional responses, such as fear, greed, and overconfidence, can override rational analysis and lead to biased decision-making processes.
These qualities of human cognition and decision-making can produce various actions and outcomes:
- Overconfidence: Individuals may exhibit overconfidence in their abilities and judgments, leading them to take excessive risks or make overly optimistic predictions about future outcomes.
- Avoidance of Uncertainty: People may avoid situations that involve uncertainty or ambiguity, preferring familiar and predictable options even if they offer lower potential rewards.
- Reluctance to Change: Cognitive biases can create inertia and reluctance to change established beliefs or behaviors, even in the face of new information or changing circumstances.
- Suboptimal Decision-Making: Cognitive biases can result in suboptimal decision-making processes, leading to missed opportunities, financial losses, and other adverse outcomes.
- Reinforcement of Biases: Confirmation bias and other cognitive biases can reinforce individuals’ existing beliefs and biases, creating self-reinforcing cycles of thought and behavior.
In summary, while individuals may possess qualities of risk aversion and cognitive biases, they may not always recognize or acknowledge these tendencies in themselves. Awareness of cognitive biases and their potential impact on decision-making is essential for improving judgment, reducing errors, and making more informed choices in various domains of life, including investing and finance.
While I don’t intent to overuse this type of research method on this website, I did find that block interesting and helpful and was unable to, in good conscious edit or alter it to “make it my own”. So I present it to you raw.
This may seem a bit esoteric. It’s actually very practical.
There are no secrets in markets. Only surprises.
I trade surprises.