The perceptual ambiguity of wine helps explain why contextual influences—say, the look of a label, or the price tag on the bottle—can profoundly influence expert judgment. This was nicely demonstrated in a mischievous 2001 experiment led by Frédéric Brochet at the University of Bordeaux. In the first test, Brochet invited fifty-seven wine experts and asked them to give their impressions of what looked like two glasses of red and white wine. The wines were actually the same white wine, one of which had been tinted red with food coloring. But that didn’t stop the experts from describing the “red” wine in language typically used to describe red wines. One expert praised its “jamminess,” while another enjoyed its “crushed red fruit.”

The second test Brochet conducted was even more damning. He took a middling Bordeaux and served it in two different bottles. One bottle bore the label of a fancy grand cru, the other of an ordinary vin de table. Although they were being served the exact same wine, the experts gave the bottles nearly opposite descriptions. The grand cru was summarized as being “agreeable,” “woody,” “complex,” “balanced,” and “rounded,” while the most popular adjectives for the vin de table included “weak,” “short,” “light,” “flat,” and “faulty.”

Nothing really need be said. These types of errors crop up so frequently, in so many areas of life, it is truly amazing that we get anything done.

I now come to behavioral finance. I’ll work from the wikipedia definition as it provides at least a common ground for a definition and a starting point.

The first point that is important to recognise is that examining the data of Fx traders, however large or small, only looks at the data that presents their ‘demonstrated demand’ for means to achieve desired ends.

We have no way of knowing what those ends actually were. A simple example will hopefully make this clearer: “A” walks out of the front door of his house. Freeze frame. “A” has demonstrated a means, via leaving his house, to accomplish an end. What is that end? No-one knows. “A” gets on, and starts the engine of his Ducati. He displays more means. What is his end? No-one yet knows.

Returning to the historical data that Rhody wishes to access for statistical analysis. We have a group, made up of individuals, with a mixed bag of ‘outcomes’ which will be ranked via an arbitrary criteria of our researcher. Referring back to Mr. Soros and his various variables, what were an exhaustive list of variables to be contrasted against the arbitrary criteria, so that we can trace ‘backwards’ the outcomes, to the means, backwards to the ends or ordinal values held in the minds of the individuals?

Behavioral finance [economics] seeks via bounded rationality to explore first, the ordinal value rankings, which are unknown, second, to evaluate the decision making process that constitute the selection of means.

Just how – do they start, or complete, this rather impossible task?

This is how:

Another way to look at bounded rationality is that, because decision-makers lack the ability and resources to arrive at the optimal solution, they instead apply their rationality only after having greatly simplified the choices available. Thus the decision-maker is a satisficer, one seeking a satisfactory solution rather than the optimal one.[2] Simon used the analogy of a pair of scissors, where one blade is the “cognitive limitations” of actual humans and the other the “structures of the environment”; minds with limited cognitive resources can thus be successful by exploiting pre-existing structure and regularity in the environment.[1]

Notice, there is not even a pretense, or, worse, complete ignorance of the fact that the means selected, and we haven’t even reached their methodology yet, will be driven via their ordinal value system.

I’m very interested to hear from anyone who is involved in this field to explain this anomaly.

Trading discipline is one of those subjects that crops up on a pretty regular basis somewhere, and most individuals, if they have traded for any length of time, normally have a horror story or two to tell where discipline evaporated and was followed by money.

Daytraders are particularly prone to discipline blow-ups, not because of any systemic psychological failings attributed to the daytrading class, but rather due to the number of decisions that need to be made, and the speed at which they need to be made.

The napkin sketch reveals the truth of the matter. The odds of success fall more or less proportionally to the number of decisions that you have to make, or as the napkin puts it, as reliance on willpower and discipline increase, so falls the odds of success.

The answer then is to reduce the reliance on willpower & discipline. This can be easily accomplished by stretching the timeframe of your trades to a longer swing-trading methodology. I am not advocating a buy & hold forever Buffett strategy, and that I suspect is a false image of the man anyway. No essentially it means trading a longer timeframe and seeking to capture the majority of the trend within that timeframe.

In the newsletter I have a hybrid methodology that works through 2yr and 3mth timeframes, both interacting with each other. Now this is my personal choice, and although it is available as an option, its not a mandatory. The ‘signal’ however has been consistent for 7 weeks to date, and would have garnered you an 18% return to date. I have however been calling for long positions only since August 2010 [easily verified via blog]

The point is, in this case, there is only a weekly decision to make, possibly adding a trailing stop-loss that can be automated via GTC market orders, so that if ‘open profits’ are threatened, you are taken out of the market. Through automating you decisions, you no longer need make decisions under fire, in fact, you don’t actually need to watch each tick of the market at all if that’s not really your thing.

In summary, this solution is not about developing the mental discipline required, for the most part, you either have it or you don’t, and if you don’t, it will fail you at the worst possible moment. Rather this is about adapting your trading to a place where failure of discipline is removed as a variable that must be dealt with under fire. Your decisions are made calmly when the market is closed, automated, and left alone.

The market conditions you to the wrong behaviour.

Insiders selling:

Bad news, stock-market bulls: Corporate insiders are selling their companies’ shares at an abnormally fast pace.

In fact, one measure of that selling activity shows insiders of NYSE- and AMEX-listed companies recently were selling at the fastest rate since data began being collected in the early 1970s, four decades ago.

On the theory that insiders know more about their companies’ prospects than do the rest of us, this is an ominous sign.

Corporate insiders, of course, are a company’s officers, directors and largest shareholders. They are required to file a report with the Securities and Exchange Commission more or less immediately upon buying or selling shares of their companies, and the SEC makes those reports public.

One firm that gathers and analyzes the data is Argus Research, which publishes its findings in the Vickers Weekly Insider Report. One indicator that the firm calculates is a ratio of the number of shares that insiders have sold in the open market to the number that they have purchased.

In the week ending last Friday, according to the latest issue of the Vickers report, this sell-to-buy ratio stood at 6.43 to 1. This is higher than 95% of other weeks’ readings over the last decade.

That’s ominous enough, but consider last week’s sell-to-buy ratio for just those issues listed on the NYSE or AMEX. That came in at 13.10 to 1, which is the highest reading for this ratio since when Vickers began collecting the data, which was October 1974.

Is there any way for a bull to wriggle out from underneath the weight of these high readings? Perhaps, though it’s not easy.

One counterargument bulls can make is that it’s entirely normal for insiders to sell when the market rallies, and therefore such selling does not carry particularly bearish significance.

But the stock market hasn’t exactly been rallying all that strongly. To be sure, the latest sell-to-buy ratio reflects last week, not the current one, and that week did have a better tone than the current one — but not all that great a tone.

In any case, the other occasions in recent years in which the sell-to-buy ratio rose to close to the same level it is today were on the heels of more or less uninterrupted rallies over the previous two or three months. That’s not the case now, of course, suggesting that insider selling this time around may not be so benign.

Another bullish counterargument is that the volume of insider transactions last week was light, as it usually is during earnings season. That’s because insiders are either reticent to buy or sell their companies’ shares in the days and weeks before their companies report earnings, for fear of being charged with acting improperly.

But I’m not sure how much weight to put on this argument. There still were several hundred firms with insider activity last week, and it’s unclear why earnings season would have discouraged just those insiders who otherwise were interested in buying.

Furthermore, it’s worth remembering that the extensive Vickers database encompasses many other earnings seasons besides the current one. Also, the latest insider sell-to-buy ratio is higher than almost all comparable readings from those prior seasons.

Perhaps the strongest counterargument the bulls can muster at this point is that the insiders are not infallible. That indeed is true. Still, researchers report that they have been more right than wrong.

At a minimum, I think we can all agree it can’t be good news that insiders recently have been selling at such a fast pace.

Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.

Then look at the data.

The history of insider selling/buying has meant nothing. The insiders, as much as they might or might not know about their own company, hasn’t resulted in any great insights that can be extrapolated generally. They [insiders] seem to be affected by the same forces that apply to most of us. They like to buy at tops, and sell at the bottom.

“Only Russia (48%), USA (42%), South Africa (41%) and Egypt (25%) remained sceptical about the scientific evidence that exists to support Darwin’s theory.

The results also show that a significant proportion of those people surveyed in the USA, South Africa and India (43%) believe that all life on Earth, including human life, has always existed in its current form.

In all other countries, people in China (74%), Mexico (69%), Argentina (68%), Great Britain (63%) Russia, Spain (56%), and Egypt (52%) were of the view that more people thought that life on Earth, including human life, evolved over time either by a process guided by God or as a result of natural selection in which no God played a part.

From Dr Brett

This post will begin a review of the key ideas from my three trading psychology books and the roughly 3700 blog posts on this site. Wherever possible, I will link to posts and resources pertinent to each topic for ready reference.

But first an introduction to trading psychology. The relevance of psychology for trading is based upon two important realities:

1) Trading is a performance activity, much like athletics or performing arts. Psychological variables influence both the acquisition of skills in any performance field and the application of those skills. While there is much more to performance than mindset alone–talents, skills, and interests must align–the wrong mindset can greatly hamper performance;

2) The human mind does not process information efficiently or effectively under conditions of risk and uncertainty. To simply “trade what you see” is a recipe for falling prey to a variety of cognitive and emotional biases. The trader’s psychological development is crucial to learning how to properly gauge risk and reward when performance pressures mount.

Trading psychology is not something that is simply appended to trading practice: it is an integral part of functioning as a trader and is acquired in the process of learning how to trade. It is through the trader’s developmental process that he or she learns how to manage risk, how to temper overconfidence and fear, and how to sustain positive motivation.

Indeed, a proper training curriculum for a new trader is one which helps the trader and the trading develop over time. A great deal of psychological learning comes from making the classic mistakes that bedevil all new traders: making impulsive decisions, allowing fear to overtake opportunity, overtrading, allowing losing trades to run and capping winners, and the like. If you can make those mistakes–and learn from them–long before you put the lion’s share of your capital at risk, you will have an opportunity to grow into the trader you’re capable of becoming.

Sometimes the best therapy for your trading is to get into therapy yourself. The markets are an expensive place to be working out your issues about success/failure, competency/adequacy, and need for approval/esteem. Many people take their repetitive patterns from family and romantic relationships and enact them in trading. When that is the case, psychological development needs to precede trading development: resolving those issues is the best way to approach markets with a clear and open mind.

Eventually, you will be able to take your psychological development to the next level of trading: you will recognize when others are making the mistakes you used to make. You will see markets acting on fear and greed and you’ll be able to take the other side of those reactive trades. You’ll observe when market sentiment is tilted one way and price can no longer sustain its trend. Developing yourself psychologically doesn’t mean that you’ll be free of emotion; it means that you will become increasingly competent at using your feelings as useful trading information.

His books:

The Psychology of Trading is a good introduction to the topic of how life’s challenges play themselves out in the trading world.

Enhancing Trader Performance is a good introduction to the learning curves of traders and the process of developing competence and expertise.

The Daily Trading Coach is a good compendium of self-help ideas and techniques for traders looking to coach themselves toward better performance.

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