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Pattern Seeking Brain

 



“I gained because I knew this”

“I had told you so”

“I told you, stock X is going to double”

“I knew this is going to happen, had predicted it long back correctly”

What is one common thing you can sense in all the above remarks?

The need to control, which stems from the need to predict and to create a narrative. Our brain is wired in a way that it needs to seek patterns in past events, analyze new information or events, and categorize them in accordance with past events.

A narrative creating machine that we are, we find a correlation between the most random events which have the remotest possibility of being correlated.

Let me explain, say you bought shares of Tesla. Is it suppose to obey you and rise in price because you bought it? The stock has no clue and is not even interested in knowing who bought it.

Hell, it should ideally not even move just because Elon Musk tweets something. But it has moved in recent times whenever he has tweeted.

Now there are two possibilities for why this happens :

  1. The number of speculators is so high and they heavily rely on what and whether Elon has tweeted something or not. They base their decision to buy or sell more based on his tweets. You see the problem here is in short term this is no better than gambling, relying 100% on luck. You would be better off deciding based on a coin toss whether to buy or sell the share rather than deciding based on tweets.

    Don’t get me wrong here, you might end up gaining a lot deciding on such tweets once or maybe twice but that would be an exception to the rule. That would be pure luck, a random event. But what will this do to your confidence and narrative-building pattern-seeking brain?

    The last time Elon tweeted, I bought and the shares went up. Let me keep track of whenever he tweets and I’ll buy. Well, you have a recipe for disaster.

  2. Coming to next reason why a stock might have gone up is that he just happened to tweet just before the stock ran up. In fact, there need not be any reason for the stock to run up except for people to wake up and feel Tesla should do well and to participate in the same keep buying, in the process bid prices so high that end up getting some gain. A very random event with no connection. What did our narrative-seeking self do, anticipate the next tweet or effect of the same, and decide on the based on that?

How can you avoid falling prey to this?

  • Seek disconfirming evidence, anytime you find yourself holding on strongly to some view talk to a person with an opposing view and listen carefully.

  • Be willing to change your mind frequently when provided with new information.

    Well when events change, I change my mind. What do you do?

    - Paul Samuelson

  • Recognize that you have blind spots and in order to avoid them build a process for taking important decisions in life.

  • A little delay in making a decision wherever possible helps. For example, try sleeping over something that you want to decide about and do it the next day.

  • Don’t beat yourself up over losses due to such mistakes but make sure you learn from them.

Disclaimer: The stock name and anything related to that is mentioned only as an illustrative example, should not be considered as advice for buying or selling the stock.



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