Skip to main content

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.



Comments

Post a Comment

Popular posts from this blog

Investing like Long Distance Running

  What does investing in the stock market & running a marathon have in common? Running long distances requires a lot of stamina and mental strength. It takes hours of deliberate practice, self-belief, and doses of strength training. Is investing any different? You’ll figure out in. Let’s assume you have practiced and you have all that requires running a marathon covered. Cut to the day of the actual marathon and how you can think of it as similar to investing. Let me divide it into 4 parts of 10km’s each for simplicity assume full marathon is of 40kms exact. The race flags off after the Zumba warm-up and you’re all fired up and excited. You leap and run at your maximum pace leaving everyone behind for a brief moment. This is akin to when you start your stock market journey with your initial capital having read all those books and thinking you know everything but having zero market experience. Let’s say you do earn a decent return on your first idea but they
Post a Comment
Read more

The ultimate test of understanding

                                                                            Source Here’s a simple test to check whether you really understand a certain topic or not? Pick the topic of your choice, which you think you know well. Now try explaining it to a 14-15-year-old child or someone who has absolutely zero knowledge about that topic. If you’re successfully able to make the chosen person understand your idea- congrats you do know the topic well after all. A lot of us might fail at this simple activity including yours truly. I know its difficult to accept the fact that things you thought you knew so well you don’t actually know them so well. Our brain gives us a false sense of understanding based on mere reading or just knowing about something as understanding it. We take great comfort in the same. Allow me to introduce the Feynman technique of learning by Nobel prize-winning physicist Richard Feynman. 1. Identify a subject or topic 2. Explain it to a child – this wo
Post a Comment
Read more

Are you Biased?

We are all biased!! Yes, I said that out loud, we all are. It includes yours truly too because I am no exception. Let’s define what bias means before we delve into different types of biases. Wikipedia defines bias as “disproportionate weight in favor of or against an idea or thing, usually in a way that is closed-minded, prejudicial, or unfair”. Biases stem from the way our brain is structured to help us. Our brain always tries to keep past experiences in mind, remembers what gives us pain or pleasure, what worked to give us recognition or what led to failure, and tries to make sense of the present and future decisions based on them. So, the brain doesn’t recognize that it could be a bad thing for us. Biases make us irrational in our decisions and choices. Now almost none of us can eliminate biases because its difficult to recognize the bias when you’re actually being biased because your brain tricks you into believing that what you’re doing is the right thing to do.
Post a Comment
Read more