Mr Romulus


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The last day of law school.

It will be quite a last day. 2 oral presentations of written assignments and picking up a crucial mark in the Environmental law assignment, worth 60% of your final grade. A B+ means that you pass the course.

Mr Romulus is missing.

Normally he is waiting for his breakfast. Not this morning. Normally, as soon as he sees or hears that I am up, he would make his way home. Not this morning. He is old and hasn’t been the best for a few weeks now. I am concerned.

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Mr Romulus is unwell. Vomiting all over the place. Not a call the Vet sort of vomit, just a get out of bed and mop it up sort of vomit.

mrromulus2

We had an emergency earlier in the week. Mr Remus was caught in a snare trap [we believe] and must have been trapped for somewhere in the region of 20hrs, before someone released him, realising their error.

He made it home, with a grotesquely swollen paw, gangrene had set in, or very close to it: we immediately rushed him to the vet, which necessitated an emergency call-out. He was treated with anti-biotics and fluids.

We brought him home yesterday, and he seems to be on the mend. It’s still touch-and-go as to whether he will have to have an amputation, or whether he will recover. He is a tough little bugger though, so we are hopeful.

Humans have several psychological tendancies that when exposed to the machinations of the financial markets, result in sub-par performance.

The first one that needs exposure is the tendancy of human psychology operate in the following aberrant fashion. Human psychology does not operate to maximise gain rather it operates to maximise the chance of gain.

This subtle difference thus generates the following manifestations of pathology within the trader. First, losses become the subject of a gamble. As a loss is a bad outcome, holding on “a little longer” might see the trade profit or breakeven. Thus is discipline very slowly eroded. Eventually, a career threatening loss might be the ultimate result.

Second, wins are taken quickly. The old Wall St adage of “you will never go broke taking a profit” is offered up as empirical evidence. I have actually observed this very quote earlier in the week with these exact sentiments being echoed by none other than flip-flop-fly.

Mr Market conditions unwary participants to this very pathological reflex behaviour through the following mechanisms. Price tends to cycle through repeated areas, thus engendering the psychological response of anchoring. Here, the trader links the current price as normal, and a large move as aberrant.

The result is sadly predictable. If facing a loss, the belief of exiting at a small profit or breakeven, tempts the trader to take the gamble of a small win, against a known loss, or conversely, to take a small known profit, against the gamble of a larger win.

This tendancy has been well documentated within the “Behavioural Finance” literature. The correct behaviour actually requires obviously first recognition of the problem, and second, understanding the nature of timeframes in the formation of the pathological reflex. This will be addressed next weekend. Until then, good trading.

Smoke rings
Mr Romulus.