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Herding Bias
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Herding Bias

by The MoleMarch 22, 2016

Something very interesting happened during our trip back to Valencia last Sunday. After checking our luggage and passing through the airport’s security procedures we had a bit of time to spare and decided to grab lunch at a promising looking grill restaurant. As we picked our table my wife noticed a black  Samsonite suitcase that apparently had been left right next to it. Call me paranoid but I immediately took a step back and asked the fellow travelers around us if it was theirs. Nobody responded.

To me this looked rather suspicious and I marched over to the restaurant’s staff and asked them to immediately notify airport security about an abandoned suitcase. They hesitated a bit but then agreed to take action. In the interim I joined my wife who had already moved herself outside the immediate ‘blast zone’ about 10 meters (30 yards) away, which in retrospect was rather silly as this wouldn’t have done much good at all in the case of a real explosion.

A minute later some fat guy who had been snarfing up his lunch just a few tables away from us finally stood up and claimed his suitcase with a dim witted grin. Not only had he not paid any attention to the entire situation around him but he also had committed the cardinal sin of not keeping an eye on this own luggage. The one thing that really surprised us the most however was the fact that none of the people sitting near the suspicious luggage seemed even the least bit concerned at all as they happily kept chatting away whilst munching on their meals. Again, perhaps I’ve become too paranoid after having spent 20 years in the U.S. but in light of an ongoing series of terrorist attacks ove here in Europe that behavior rubbed me as being extremely foolish bordering the careless.

I really wonder what it would take for the average person to respond or at minimum consider the potential for danger. It’s not that there hasn’t been any recent precedence and just today, this very morning, 26 people died and dozens were severely injured in three separate suicide blasts in Brussels, Belgium. I’m not saying that these poor souls could have escaped their slaughter – clearly there’s very little one can do against someone who’s willing to blow himself up right next to you. But if you’re in an airport and come across an abandoned suitcase or suspicious looking package then you owe it to yourself and the people around you to take immediate action. Don’t look at others to do it and don’t worry about potentially embarrassing yourself in front of people you will most likely never ever see again in your life.

Of course most people don’t seem to think that way plus social experiments have shown over and over again that the average person is extremely receptive to following herd behavior. Watch the video above which shows footage of the famous smoke experiment demonstrating a very typical response to a potential fire in an adjacent room. The researchers slowly blew smoke through a slit below the door connecting the two rooms whilst observing the actions of the test subject. On her own she took action almost immediately. However the next time around several research assistants joined the test subject and feigned complete lack of interest whilst smoke continued to enter the room. To make a long story short – it took over 20 minutes for the test subject to finally take action and leave the room.

Running With The Crowd

Of course this cognitive bias also extends into the financial realm. And to some extent it actually works quite well for a while – until of course it doesn’t. Let me be clear: There is no problem with running with the crowd as long as it continues being right. The exact inverse of herding bias of course is chronic contrarianism in the face of price action that continues to run against you. So we should clearly differentiate between acting contrarian just to spite the crowd or based on a personal bias or sense of righteousness (e.g. ‘this shouldn’t be happening’) and taking a contrarian stance on the basis of clear clear technical evidence relative to your respective market lens.

The best approach in my mind is to simply ignore the crowd altogether and always evaluate your actions based on your own criteria. There are a few exceptions of course (e.g. a mass of people running in a particular direction screaming in fear) but it’s always advisable to not make yourself dependent on the behavior of other people in your daily life as well as when it comes to trading the markets. As a matter of fact I would like propose a little exercise for all of you today and going forward. Next time you find yourself looking at others for behavioral clues – ask yourself: what is it that you find appropriate based on the situation at hand?

Perhaps you are sitting in a waiting room at your dentist and everyone is quietly staring at their mobile phone. Scan those people around you and evaluate their actions and behavior, even their body posture. Why are they acting this way? Would they act the same sitting in a bar? Why for example do people in a bar feel compelled to act a certain way and completely different somewhere else? Would it be appropriate for a woman to hike through the mountains in her underwear? And why is it fine as long as she does it near the beach? Clearly she would get a tan either way and you often see people sun bathing at alpine resorts. You will soon find that many things we do are purely based on learned behavior. And that is fine and perhaps necessary to assure social order and minimum social friction, but in some situations it can be detrimental  as well. As the old saying goes – know when to follow the rules and when to break them.

So I’m not at all suggesting to you to question and abandon all social norms. The overall intent here is to make yourself conscious of the fact how much of our life is dictated by crowd behavior. This even extends to dress codes, for instance here in Spain it’s rather easy to recognize foreigners as most of them insist on wearing short pants and sneakers, no matter what and even if it’s rather chilly outside. The Spaniards however rarely resort to such casual clothing unless temperatures push markedly above the 30 degree Celsius mark (86 F+). They prefer to dress rather conservatively and it’s not unusual to see ‘encorbatados’ having their lunch break in the heat of the sun with their suit jackets on. I personally would probably die from heat stroke right on the spot but they don’t even seem to break a sweat.

Clearly much of our social behavior has been ingrained from birth and there is nothing wrong with keeping a low profile and following the crowd as long as it suits you. But it’s very good practice to at least condition yourself on a constant basis to observe your own behavior and especially that of others. Who knows – one day it may indeed safe your life. And if nothing else critical thinking and independent decision making will make you a better investor/trader.


About The Author
The Mole
Mole created Evil Speculator amidst the chaos of the financial crisis in early August of 2008. His vision for Evil Speculator is a refuge of reason, hands-on trading knowledge, and inspiration for traders of all ages and stripes. You can follow him and his nefarious schemes at various social media waterholes below.
  • Ronebadger

    Mole, you did the RIGHT thing! I’d do the same…I’m very suspicious of the very kind of thing you saw.

  • http://evilspeculator.com Sir Mole III

    Good man.

  • Round we go

    awesome post mole, principles before consensus. consistent principles gets you somewhere.

  • http://evilspeculator.com Sir Mole III

    Any of you guys ever read Andy Grove’s ‘Only The Paranoid Survive’? He survived a concentration camp and post WW2 ventured to the U.S. and started Intel Corporation. Very amazing story.

  • http://evilspeculator.com Sir Mole III

    Oh shit – he just died yesterday!!!

    https://newsroom.intel.com/news-releases/andrew-s-grove-1936-2016/

    RIP Andy :-(

  • Round we go

    Paranoid is wasted energy during complacent time ( most of modern civ time ).
    During crisis paranoid will save your ass.

  • Round we go

    TWM weekly at 50ma and the daily at 200ma. time to load up if your bear.

  • ridingwaves

    A pioneer of the valley passes away…He was an amazing story….

  • CandleStickEmUpper

    Living in the USA, in the N.Y.metropolitan area, most people are quite aware and almost paranoid of terror attacks. Not to mention, the repeated voice playing at and pasted on every subway, bus , or train station “if you see something, say something”

  • ridingwaves

    not ready yet, if the Brussels news didn’t throw market a scare, it has an agenda…any down moves looks to be after Easter

  • CandleStickEmUpper

    Long nq 4412.50

  • http://evilspeculator.com Sir Mole III

    This really sucks – I regret never having met the man although having lived in Silicon Valley for several years.

  • ridingwaves

    I travel for business a lot and most people are what Mole describes….too busy to take notice or care….though, in a airport once your checked in its the opposite of busy….

  • http://evilspeculator.com Sir Mole III

    I am starting to appreciate this despite the fears of big brother and a surveillance state. We can’t have it both – open borders and security without oversight. If this shit continues we may have to move back to the U.S. – or perhaps some remote island. Tenerife is looking pretty good! 😉

  • Round we go

    the surveillance state makes sure you need a surveillance state.

    https://www.youtube.com/watch?v=8y06NSBBRtY

  • ridingwaves

    Costa Rica, Peru and even Puerto Vallarta would work…

  • Ronebadger

    Let me know, when you pick an island

  • Round we go

    come on, if vix is not ready now, when?

  • Kishore Kumar

    Set new and highest standards for helping others in the Silicon Valley culture!
    Tribute to an amazingly great man!

    http://ritholtz.com/2016/03/just-some-immigrant-from-hungary/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+TheBigPicture+%28The+Big+Picture%29

  • ridingwaves

    RW pulls out tarot cards…I’m already short with you and experiencing draw down pain but tempered based off the strength of market…..

  • http://evilspeculator.com Sir Mole III

    I’m going to check out the Azores when the weather is better – perhaps this summer. But as we speak Spanish (sort of) now and really liked Tenerife we’re considering the Canarian Islands for our retirement. The weather is great, the landscape mind boggling, the food is wonderful, and it’s far away from all the idiots. Sounds like a winner to me.

  • Round we go

    bulls are extended as f-ck. They got nowhere to go. note macd crossed down.

  • Round we go

    i used to love traveling and flew around the world, this is one of the magical ones. northwest Maui. now I just drive to national parks and sleep in my camper van.

  • Billabong

    Been to the Azores a number of times … quiet to say the least.

  • Skidmarkalot

    Wahoo on the camper!!!! I run a Bighorn!

  • evilasevildoes

    great post Mole and am forever alert…must be the genes

  • http://evilspeculator.com Sir Mole III

    The national parks of the United States are hard to beat. I’ve seen all of them in California and the two I absolutely have to see before I die are Yellowstone and Zion.

  • http://evilspeculator.com Sir Mole III

    … but up 😉

  • ridingwaves

    the gray mare (SI) sports a nifty cup and handle, some acceleration in momo would seem to be near…20 target?

  • http://gerb-reloaded.blogspot.com/ Gold_Gerb
  • ridingwaves

    If your at Zion I would make sure I took in Bryce Canyon, Canyonlands and Arches NP as they are within 2-5 hr drive..

    In Zion, the hike up the Virgin river into the narrows is a must, it is a wet hike…..Angels landing not so much if you hate heights…

  • Round we go

    i converted a honda odyssey minivan and added solar panels. put 30K miles in US and Canada. Banff Canada is my fav on this continent. In EU swiss alps is tough to beat.

  • http://gerb-reloaded.blogspot.com/ Gold_Gerb

    MACD’s can play games.
    see that RSI? it can stay above 70 ‘as long as it wants to’.
    let’s see a few consecutive daily reds!

  • Round we go

    yah, the Virgin river narrows hike is awesome. Yah I was waist deep in water many times on the hike in Aug. I will be hitting up Grand Canyon soon.

  • Round we go

    this guy is not paranoid ( actually he maybe infinitely paranoid ), yet he will do fine

    https://www.youtube.com/watch?v=tLDYHRWXzDQ

  • mugabe

    good post

  • Billabong

    It’s amazing how much energy is pushing this bull quiet market. The NYSE Summation Index is topping 1000 and NASDAQ 600 … The highest points since July 2014. The BP Index has 7 out of 12 sectors now 80% or higher … Energy sector is 95% (is there anyone left to buy?).

  • Billabong

    The picture is a classic…

  • ridingwaves

    bio is catching a bid and I have a couple flyers working right now…XBI-IBB still down 40+%…the action in bio is kind of telling me a blow off top is near..

  • Round we go

    NQ and RUT have been treading for two weeks.

  • mugabe

    energy is only 7% of the s and p 500 so it can’t have that much effect. the breakdown is here:

    https://eresearch.fidelity.com/eresearch/markets_sectors/sectors/si_weighting_recommendations.jhtml?tab=sirecommendations

  • Billabong

    BPI is the emotional measure not a linear measure… As you point out a weighting will not impact S&P traders as much as myself trading oil companies and CL equivalents.

  • Round we go

    watch TLT

  • BKXtoZERO

    What years were you there? I was there 96-Feb 2000 as tech stocks were blowing up.

  • BKXtoZERO

    I wonder if targeting Brussels was a message that they finally figured out who runs all of the Euro crap.

  • JackSparow

    Mole,
    If you may have already read this before,
    I just remembered ( point 4 ) from your discussion above.. thought some here may like it
    http://www.rbcpa.com/mungerspeech_june_95.pdf

  • Yoda

    Gap closed on ES and European market are also closed. If we are to see a reversal South, now is a good time for it.

  • Skidmarkalot

    I remember snowmobiling in Yellowstone before they locked you into guided tours. You could go where and when you wanted to. Now you have to follow the leader…..

  • http://gerb-reloaded.blogspot.com/ Gold_Gerb

    #BlackGurusMatter
    😉

  • http://gerb-reloaded.blogspot.com/ Gold_Gerb
  • http://gerb-reloaded.blogspot.com/ Gold_Gerb

    yes. Ivan would have a thing or two to say about island ‘storms’.

  • ridingwaves

    more herding…

  • http://evilspeculator.com Sir Mole III

    I just upgraded to El Capitan and fortunately my 2012 system survived it. I know I should probably buy a new one after four years but frankly I don’t yet see the need.

  • http://evilspeculator.com Sir Mole III

    Don’t bet on it.

  • http://evilspeculator.com Sir Mole III

    ‘is there anyone left to buy?’

    famous last words…

  • http://evilspeculator.com Sir Mole III

    It really bothers me that Andy isn’t among us anymore. Fuck, all my silicon valley heroes are dropping like flies :-(

  • http://evilspeculator.com Sir Mole III

    I’m down for all that. Perhaps I’ll check with you before I head over there.

  • http://evilspeculator.com Sir Mole III

    1997 – 2000 – interesting. We may have shared a cubicle farm 😉

  • BKXtoZERO

    Coherent, Specra Physics and Lightwave

  • ZigZag

    I have a late 2011 MBP which was top of the line – Apple just replaced the motherboard, batteries and memory at their expense because of a bad graphics card solder problem. If TOS would quit bloating their platform I might get another two years out of it.

  • BKXtoZERO

    This is where kids learn to trade. My daughter is watching this one right now. https://www.youtube.com/watch?v=yIZaelw_cHE Schoolhouse Rock, Walking on Wall Street

  • topedge

    FYI you were an hour early. Europe doesn’t change time till two weeks after US

  • mugabe

    yep, it’s next weekend

  • ridingwaves
  • Ronebadger

    I’m with you on the Canadian Rockies, in general

  • Ronebadger

    Definitely Yellowstone…it’s “other-worldly”…while you’re there, you gotta tour some Grand Tetons

  • Ronebadger

    What about that “moratorium” on stock buy-backs that should have been effective yesterday…how’s that gonna play into things?

  • ridingwaves

    Southern Utah amazing colors have been known to lead to eye orgasms
    I actually went up the canyon with a bunch of adults and teens, it was so nice the teens were happy….that says a lot…this shot was about 3-4 miles in..

    http://s15.postimg.org/6zn6lxmwr/Zion_VRhike.jpg

  • Yoda

    oops

  • Yoda

    Now the gap on VIX is closed..

  • http://gerb-reloaded.blogspot.com/ Gold_Gerb

    ERY update on the Daily.

    like I said, it needs to “prove itself”.
    and so far, it has not.

    http://stockcharts.com/h-sc/ui?s=ERY&p=D&yr=0&mn=6&dy=0&id=p64897325689

    So, while I’m excited to see a reaction off the band line, this doesn’t look like a reversal at all. In observation, I’m suspicious it is turning out to be more like October/November.
    so for now, I’ll keep an eye on it, but focus on better opportunities.

  • http://gerb-reloaded.blogspot.com/ Gold_Gerb

    wooHoo.

    ..12.75 possible

    http://stockcharts.com/h-sc/ui?s=%24VIX&p=D&yr=0&mn=6&dy=0&id=p45613619519

    Thank You NIRP, QE5, or whatever you are..

  • Ronebadger

    Not on MY watch…

  • http://gerb-reloaded.blogspot.com/ Gold_Gerb

    #Iyanla_Matters
    ?

  • Ronebadger

    SPX and VIX up….slightly…

  • mugabe

    wow, I never realised it was so easy

  • BKXtoZERO

    They brainwashed me in all kinds of ways. “How a BILL Becomes a Law” etc…. they left out a lot in the kids version of things

  • Ronebadger

    Is this what they mean by forming a base?

  • CandleStickEmUpper

    Been busy as hell all day. I covered this earlier at 4425.25

  • http://gerb-reloaded.blogspot.com/ Gold_Gerb
  • BKXtoZERO

    nice

  • BKXtoZERO

    we can’t let the terrorists win! actually I can understand and respect that.
    It’s just that they are already ass-wipes every other day.

  • http://evilspeculator.com Sir Mole III

    Zero snapshot for you leeches:

    .

  • Skidmarkalot

    I’m new to being a leech….. do I read this correctly, lower right Zero indicator is showing a prolonged divergence of -1.250 even though the green line is a bit stronger in a much shorter burst? Dotted line is under water too…? Still in learning school 101

  • Grant

    Mole, just took a peak at the crazy.ivan results. It appears that your trend trading sys using a majority of Ivan’s setups has been in a draw down since June 22 of last year. We are approaching a year! I am wondering if most trend trading systems have been suffering the same fate? My TT system has been negative on the EcQ since late December. I got so bored I created a scalping rule set using Ivan’s setups which is based on my equity curve. It’s been doing quite well since I started. Anyway, been missing the rules based sys talk here so I thought I would chime in…

  • Grant

    Get rid of political correctness and profile already!

  • Kishore Kumar

    Many people may have noticed that there has been have a big drop in the bid and ask sizes for Emini. A few years back, the bid and ask sizes used to be in thousands and one could see them appear and disappear with the blink of an eye, i.e. spoofing.

    Currently, the bid and ask sizes for Emini are only in hundreds even during the RTH.

    As I understand, spoofing is illegal.

    Was it legal a few years back, when HFT had just started playing a major role in market
    manipulation?

    http://www.zerohedge.com/news/2015-04-23/dear-cftc-presenting-todays-e-mini-market-manipulating-spoofing

    Spoofing would probably require the resources that are used for HFT and not just
    something like NinjaTrader running on a laptop. The following individual is probably just a scapegoat:

    http://www.bbc.com/news/business-35863848

    What is up with the currently small bid and ask sizes?

  • Grant

    Lack of liquidity. Hence the nearly year long draw in crazy.ivan.

  • http://evilspeculator.com Sir Mole III

    System trading has been rough in the past year. Of course a system can push sideways or have a drawdown that extends a year. In general CI has held up pretty well considering all the wild tape we had to endure. I am not going to make any changes to it as I was about to give up on CI in the summer of 2014 and then it exploded higher. Boredom is just an emotion – unrelated to a system’s LT success.

    In general system traders have had a very hard time – I’ve been chatting with Mark over at Vankar who have a few other systems running and almost all of them have been in draw down with the exception of one or two. However those are relatively new systems and it’s possible they have been form fitted to the current market environment.

  • mugabe

    I could be wrong, but I think the CI graph has stopped updating at google doc. Also, the list of trades isn’t updating either. Apologies if this observation is not correct.
    edit: link-
    https://docs.google.com/spreadsheets/d/1V_SvvUfxCaHWOVD5f6GMV4ScfFSOjeQsJSrGCTQuxtI/pubhtml#

  • mugabe

    ‘I am not going to make any changes to it as I was about to give up on CI in the summer of 2014 and then it exploded higher.’
    I agree. The drawdown has been long in duration rather than deep in R terms.

  • http://evilspeculator.com Sir Mole III

    The stats are up to date – the graph was limping behind but the spreadsheet extends to 3/22.

  • randomuser6789

    The BBC article is excellent. This guy Sarao is getting in trouble for outsmarting Wall Street’s brightest. Those who rigged the market (Wall Street, Congress) don’t like the fact that Sarao beat them at their own game. Sarao couldn’t cause the flash crash by himself. He just used his opponents’ own momentum against them.
    I am now a fan of that guy.

  • Ronebadger

    Found this:

  • Grant

    True I have other businesses to run, but by using the equity curve, I have been able to flip the trades to the opposite result. Not mirror image but over time essentially the same. I have not tweeked trending rules, only cm when EqC goes negative.

  • mugabe

    Yeah, sure – that tweaking comment wasn’t aimed at you, just to make it clear.

  • mugabe

    sorry – my mistake

  • http://evilspeculator.com Sir Mole III

    I’m adding setups right now – so check the ‘current campaign’ widget. Will put up a post shortly.

  • http://evilspeculator.com Sir Mole III

    report to the dungeon

  • http://evilspeculator.com Sir Mole III
  • Grant

    CI has been resilient. Thanks for confirming my suspicions.