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The Emotional Purgatory Of Cognitive Biases – Part 2
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The Emotional Purgatory Of Cognitive Biases – Part 2

by The MoleSeptember 22, 2016

After Yellen and Kuroda in one single day we’re now being treated to Draghi’s updated postulations on how to safe modern finance as we know it. Not a day to be active which is why I’m posting the second part of our little mini series on cognitive biases. Once again a PDF of the original draft by Endika Aboitiz, Jr. can be downloaded here. The first part received quite a bit of praise/approval but also some well founded criticism. And that’s fine – if we are starting to believe that we have all the answers then we probably just stepped into another mental trap. Let’s be reminded that looking in the mirror doesn’t guarantee you that you’ll like what you see. Without further ado here are our next 25 cognitive teasers:

26. Neglect of Probability—Why you’ll soon be playing mega trillions

Leads to errors in decision-making. Following a plane crash, we cancel flights without considering the minute probability of crashing, which remains the same before and after—maybe lower after. People are equally afraid of a 99% chance as they are of a 1% chance of toxic chemicals.

27. Scarcity Error—Why the last cookie in the jar makes your mouth water

By invitation—makes you want it more. Rara sunt cara — rare is valuable. Gallery owners place red dots under most of their paintings, transforming the few remaining into rate items to be snatched quickly. We collect stamps, coins, and vintage cars when the post o ce and banks won’t take them, and old cars cannot be driven on the road.

The attraction—they are in short supply. When deprived of an option, we suddenly want it—a phenomenon called reactance. Romeo and Juliet effect – love between teenagers is forbidden. US student parties – they drink more because of the drinking age.

28. Base-Rate Neglect – When you hear hoof beats, don’t expect a zebra

Investigate the most likely ailments before you start diagnosing exotic diseases. Base rate training. Business school students: “Where do you see yourself?” Answer: “CEO of a Fortune 500 company” is common, but the chances are less than 0.1%.

29. Gambler’s Fallacy – Why the balancing force of the universe is baloney

With independent events, there is no harmonizing force at work. A ball cannot remember how many times it landed on black. If you are afraid of a bomb on a plane, taking one does not reduce the risk. A coin flipped three times, landing on heads— what is your next bet? Tails? Heads is just as likely—Gambler’s Fallacy, i.e. that something must change. Assess independent and interdependent 32. events. “What goes around, comes around” simply does not exist.

30. The Anchor – Why the wheel of fortune makes our head spin

When we have to guess—we use anchors. We start with something we are sure of and then venture into unfamiliar territory. Unfortunately, we use anchors we don’t need. Anchors abound. We clutch at them. Recommended sales prices are nothing but anchors.

31. Induction – How to relieve people of their millions

A farmer feeds a goose. At first the goose is shy and hesitant. “Why is he feeding me?” Then his skepticism goes away. “The farmer has my best interests at heart.” Months pass. Then, fully convinced of the man’s benevolence, the goose is amazed when he takes him out of its enclosure on Christmas Day—and slaughters him.

The goose fell victim to inductive thinking. Same with stocks rising and being chased. We cannot live without inductive thinking. We trust every time we board a plane that aerodynamic laws will still be valid. Remember – certainties are always provisional. Nothing is certain but death and taxes. Loss Aversion – Why evil is more striking than good.

There are more bad things than good – they are far more consequential. In the past even more – one stupid mistake and you were dead. People that were gung ho or reckless died before they could pass on their genes. Those who remained were more cautious. We are their descendants. We fear loss more than we value gain. If you want to convince someone – focus on how it can help them dodge disadvantages. Employees are risk averse – why risk something that brings you, at best, a big bonus and at worse, a pink slip? In almost all situations, safeguarding your career trumps any potential reward.

33. Social Loafing – Why teams are so lazy

The power of two animals pulling a coach does not equal the power of a single horse. On average, two people pulling together – each invests 93%. Three – 85%. Four – 49%. Explains government – over employed.

It occurs when individual contributions are not evident. Why invest all your energy when half will do? Especially when it goes unnoticed. We slack off mentally also. The larger the team, the weaker our individual performance. We hide behind team decisions — the diffusion of responsibility. People behave differently in groups than when alone. Long live meritocracy! Long live a performance society!

34. Exponential Growth – Stumped by a sheet of paper

Linear growth we understand intuitively. Exponential growth – we have no sense of. Why? Because we did not need it before. Whoever spent twice the time collecting berries earned double the amount. Five percent in action – not so bad – we double costs every 14 years. A constant of 70 divided by the rate – gives you how long it will take to double. Nothing that grows exponentially grows forever.

Everyone forgets that especially politicians, economists, and journalists. Eschericheia coli divides every 20 minutes – in a few days it would cover the entire planet. It needs more oxygen and sugar than is available, so there is a cut off. When it comes to growth rates – don’t trust your intuition.

35. Winner’s curse – Curb your enthusiasm

Winner’s curse suggests that the winner of an auction often turns out to be the loser. Regular winners are systematically paid too much and eventually go bankrupt. Bidding wars for cellphone frequencies drive telecom companies to the brink of bankruptcy. More than half of all acquisitions destroy value. We want to outdo our competitors. Auctions – advice – don’t go. If you have to, set a maximum price and deduct 20% – write it down and do not go a cent over.

36. Fundamental Attribution Error – Never ask a writer if the novel is autobiographical

Every story has a face. Be on the look out for the people angle. The tendency is to overestimate individual’s influence and underestimate external, situational factors. Economic success depends far more on the overall economic climate and the industry’s attractiveness than on brilliant leadership.

Music – the conductor – the real miracle of music is, after all, the composition, the creation of sounds, moods, and rhythms where previously only a blank paper lay. The score, in contrast to the conductor or soloist, is faceless. Our preoccupation with other people stems from our evolutionary past. Belonging to a group was necessary for survival. That is why we are so obsessed with our fellow humans today. We spend 90% of our time thinking of other people and 10% assessing other factors and contexts. Forget the performers – pay close attention to the dance of influence to which the actors are subjected.

37. False Causality – Why you should not believe in the stork

Alan Greenspan – his obscure remarks gave monetary policy the aura of a secret science that kept the country on a secure path to prosperity. America’s symbiosis with China, the globe’s low-cost producer and eager buyer of US debt, played a much greater role. Greenspan was merely lucky the economy did so well during his tenure. The Truth: Children do better if their home is full of books. The truth, educated parents tend to value their children’s education more than uneducated ones do. Educated parents have more books at home. Correlation is not causality. Sometimes that presented as the cause, is the effect and vice versa.

38. Halo Effect – Why attractive people climb the career ladder more quickly

When a single aspect dazzles us and a ects how we see the whole picture. A single quality that produced a positive or negative impression outshines everything – the overall effect is disproportionate. Beauty is the best-studied example – we automatically regard good-looking people as more pleasant, honest, and intelligent. They have it easier in their professional lives. The halo effect can lead to great injustice. It obstructs our view of true characteristics.

39. Alternative Paths – Congratulations! You have won Russian roulette

About outcomes that could have happened but did not. They are invisible, so we contemplate them very rarely. Risk is not always visible. Always consider what the alternative paths are. Looking at them from the outside is di cult – from the inside, it is almost impossible.

40. Forecast Illusion – False prophets

In terms of forecasts, the experts fared only marginally better than a random forecast generator. Media darlings are among the poorest prophets of doom and disintegration – the worst. Experts enjoy free reign with few negative consequences.

41. Conjunction Fallacy – The deception of specific cases

The difference between intuitive and conscious thinking is signifcant.

42. Framing – It’s not what you say, but how you say it.

We react di erently to identical situations, depending on how they are presented. C’est le ton qui fait la musique. Which piece of meat is healthier – 99% fat free or 1% fat meat. A fallen soldier, no matter how stupid, turns into a war hero. Realize that whatever you communicate, it has an element of framing.

43. Action Bias – Why watching and waiting is torture

On penalty shots, goalies dive to the left or to the right. Rarely do they stay in the middle. One third comes through the middle. Why? Appearance. It’s more impressive and less embarrassing diving to the wrong side than to freeze on the spot and watch the ball sail past. It looks active, even if it achieves nothing. In the hunter-gatherer society—deliberation could be fatal. So we are inclined to be seen as doing something. All humanity’s problems stem from man’s inability to sit quietly in a room alone.

44. Omission Bias – Why you are either the solution of the problem

A drug will save 80% and kill 20%. Most will withhold approval. You approved it; you get cruci ed the moment the rst person dies. Active euthanasia is punishable by law. Refusal of life-saving measures is legal. Vaccination–okay not to vaccinate. All society at risk. Deliberate inaction seems less grave than a comparable action. We are more lenient on companies that develop no products than those that produce bad ones even if both roads lead to ruin. Building no emission lter on a coal plant feels superior to removing one for cost reasons. Neglecting to declare income tax is less immoral than faking tax documents. Action is more noticeable than inaction. If you are not part of the solution, you are part of the problem.

45. Self-serving Bias – Don’t blame me

Annual reports – on a great year you read of what the CEO did. On a bad year, we read of all sorts of other dynamics like the exchange rate, government interference, and malicious Chinese trade practices. When you do well, it’s because of you. When you don’t, some other reason comes to play. Get honest opinions. Appreciate the people that give it to you.

46. Hedonistic Treadmill – Be careful what you wish for
47. Self-selection (SS) Bias – Do not marvel at your existence

“Why is it always me?”You just think you pick the wrong lines.
SS bias is pervasive.

48. Association Bias – Why experience can damage your judgment

We eat an unknown fruit, we get sick, we avoid it, in the future labeling the plant. This is how knowledge comes to be. This method also creates false knowledge. Advertising creates a link between products and emotions.

You will never see a Coke around a frowning face or a wrinkly body. False connections are the work of association bias, which in uence the quality of our decisions. We condemn bearers of bad news.
Get out of an experience only the wisdom that is in it and stop there, lest we be like the cat that sits on a hot stove lid. She will never sit down on a hot stove lid and that is well. But she will never sit on a cold one anymore.

49. Beginner’s Luck – Be wary when things get on to a great start

Napoleon nor Hitler would have launched a campaign against the Russians without the previous victories in smaller battles to bolster them. How to tell the difference? If you are much better than others over a long period of time, then you can be fairly sure that talent plays a part. If you establish yourself as the market leader among many competitors over many years, then you are probably better.

50. Cognitive Dissonance (CD) – Sweet little lies

Common errors in reasoning. You set out to do something and fail. You can resolve it by somehow getting the grapes, by admitting your skills are insufficient, by re-interpreting what happened retrospectively. The last is CD.


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

    Any of you steel rates still long the spoos?

  • Mark Shinnick

    Umm….how about by only being not short?

  • ridingwaves

    no, seems selling is taking place underneath this surge…..weird action right now…

  • OJuice

    I got stopped out of my “retail” short from last week on the first surge after the Fed announce my. And opted to do nothing out of fear of getting flattened.

  • OJuice

    What are you looking at?

  • BKXtoZERO

    I entered TVIX again, 17.96, may hold if we roll over here today. I posted in yesterday’s thread, reading your post about my weaknesses rt now.

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

    Not interested in stawks for now. Getting a better return on PMs.

  • http://evilspeculator.com Sir Mole III

    Works for me.

  • BKXtoZERO

    out of half flat

  • Mark Shinnick

    Yeah…there’s Pavlov momo left to go from yesterday and continued $ weakness.

  • Mark Shinnick

    I’m only guessing but in-part, XIV reaching 38 zone target then backed-off.

  • ridingwaves

    Partly..sector rotation movements most likely…but interesting to say the least…

  • http://evilspeculator.com Sir Mole III
  • http://gerb-reloaded.blogspot.com/ Gold_Gerb

    Who?
    oh!
    that Wallstrip guy.

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

    watch you don’t overstay your welcome with the PMs. You got the relief rally, which looks to be fading now.

  • Mark Shinnick

    Yeah….I see $yen and $ looking supportive here, gold at expected resistance….I’m aiming to short miners if I get my price.

  • Yoda

    patience grasshoper

  • Yoda

    After the tree was shaken out of weak hands, now is not the time to short PMs, but to buy on weakness.

  • Mark Shinnick

    Yep…its all true at the same time….amazing :)

  • Tomcat

    Exited yesterday

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

    shake out is all it is…..

    the mm’s have a little window before comex opex on Monday to do some more shaking

  • OJuice

    Risk on, but not enough demand to push through overhead resistance?

  • http://evilspeculator.com Sir Mole III

    This is actually extremely disturbing Juice – the gate is wide open and the buy side is not pushing it. I’m taking partial profits here if we don’t see any movement EOS.

  • ridingwaves

    just consolidating here, 2165 SPX area could act as support now…

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

    confirmation of my neutrality.
    Confirmation Bias!

    Bad GG. Bad. down boy.

  • OJuice

    It almost looks like the move from yesterday and this morning was all the program based strategies adjusting positions post FED. And then that was it.

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

    QQQ’s.
    I suppose 119.66 upper limit is possible tomorrow.
    uncharted territory (here).

    http://stockcharts.com/h-sc/ui?s=QQQ&p=D&yr=0&mn=6&dy=0&id=p00776840726

  • http://evilspeculator.com Sir Mole III

    Actually technically speaking it is ‘charted territory’ as we have traded at these price ranges before 😉

  • Yoda

    LOL, great one. Ha!

  • BKXtoZERO

    whos he?

  • ridingwaves

    dont look now but IBB may break out here…

  • Mark Shinnick

    ….must have been a cognitive bias :) Anyway..got short miners.

  • http://evilspeculator.com Sir Mole III

    Twitter bigwig and finance guy. Google is your friend.

  • kudra

    you buying? not looking so hot.

  • Tomcat

    You beat me to it…I was just gonna post the inclination to go short biotech here…with a tight stop, because above $300 all bets are off.

  • ridingwaves

    see below..

  • ridingwaves

    I don’t know if I would short it here….the Fed and Japan said let Money ring, let money ring for a couple more months..
    https://www.youtube.com/watch?v=Bodlx2QLblY

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

    Swift and clean….pretty nice really hammered a lot of players.

  • http://gerb-reloaded.blogspot.com/ Gold_Gerb
  • http://evilspeculator.com Sir Mole III

    Bears got hammered into submission. Again.

  • BKXtoZERO

    What gets me is that I’ve been on the right side of the major moves a lot more often than the wrong side. The big directional changes. I used to get killed 100% of the time back when I was REALLY dumb. I’ve nailed quite a few turns but what gets me most often the last 2 years is not the big surprise, but how long they can keep shit up. Every gap is protected and built upon. I am always just kind of dazed that the market can be so tightly controlled for so long. Time chews me up more than price. Let’s see if they can do it again.

  • http://evilspeculator.com Sir Mole III

    BTW, poison words:

    1) they (okay, i use it occasionally but sparingly)
    2) how long can they keep shit up (longer than you can stay liquid)
    3) what gets me (you can’t be affected if you don’t care)

  • http://evilspeculator.com Sir Mole III

    I wasn’t pointing out that one guy – it’s the flood of retweets and likes today.

  • BKXtoZERO

    oook. rare show of “some” emotion, although I am not really flummoxed at the moment. The hard part is “Do you trust it” These things play out again and again but each time seems harder for me to trust longer term, even 2 weeks. Obviously many “smart” people/investors/traders have gotten killed or not kept up with indexes. They too, face: do I just BTFD and trust? Geme theory for me is that “they” (yup) are all about confidence. Buy terror attacks etc. Any challenge is usually met head on at new highs. I think I am just shifting to a more metals friendly environment for years to come. BTFD in anything metals is what I am thinking. Like you, I can see DOW 1 million in money printing world.

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

    Yes indeed.

    I have a saying (of many).
    “Nothing Fast, …..Lasts”

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

    I think the bear coats will stay in the closet until post US elections.
    Maybe even Q1, given a rounded top.

    https://uploads.disquscdn.com/images/0ac4ae2220895b6951fa0d0f0391d0d70b74a5f3e505563fca0c5626b1928f33.png

  • Mark Shinnick

    Yep. Capitalism and normal cycles have been plainly hijacked by former Cold War communists who now run institutions like the EU. The narcissism model seems to best apply and for that we must either run away (i.e. lack of participation), or hone our edges in adapted ways. The environment is nonetheless very seriously polluted and life can usually figure out a way.

  • BKXtoZERO

    much more eloquent than what I said. yup.

  • Mark Shinnick

    Well… I’m still pretty fuckin pissed-off about it :/

  • http://evilspeculator.com Sir Mole III

    “Like you, I can see DOW 1 million in money printing world.”

    You know that was just a silly joke, right?

  • Tomcat

    Good point

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

    to tell you the truth I thought you were serious, but, that concept has been on my mind for years anyway. Looking at previous hyperinflations, zimbabwe, others, stocks in nominal terms go to high numbers but aren’t worth much. We’vr brrn doing that just in slow motion. Gets tiring when gov has no rules, no limits, no fundamentals etc