THE WAYS WE CON OURSELVES
I support a particular hospital charity that each year or so runs a home
lottery and every year I enter. To date I have won a digital camera, an iPod,
an Apple TV, a tonne of chocolate, wine (brilliant for a non-drinker but good
for presents) and a host of other goodies. In fact I have never had a time when
I have entered and not won something. Whilst my expectancy is not quite positive
it’s not bad. If I were a news agency that sold lottery tickets and I had this
many winning entries bought via my store people would be clambering over me
thinking there was something special about my store.
One of the things we ignore in life is that we are subject to the same
harsh statistics as everyone else – we have what I call the myth of individual
specialness. Our basic narcissism leads us to believe that the laws that apply
to the universe don’t really apply to us, as a result we spend a lot of time
fooling ourselves into think there is something special or magical about what
we do.
My capacity to win this particular lottery has nothing to do with me
other than the fact that I enter, I am simply subject to the laws of large
numbers as is everyone else. If you get enough people doing the same thing over
a long period time then the probable drifts into the realm of the inevitable.
It is no wonder some people win the lottery twice.
But because we are such poor natural statisticians this seems like magic
to us and we ascribe some special quality to ourselves and this is apparently a
well-known phenomenon in both lottery winners and those who have inherited
wealth. They believe that something divine about themselves means that they
were meant to win – they cannot accept that it was blind luck. My wife has a
friend who received a very large inheritance from her parents, she has now
divorced herself from all her friends of many decades because she believes that
there is something superior about herself other than being the lucky product of
the sperm sprint derby that we all undergo. Sometimes you land in the right
spot and sometimes you don’t.
The central issue here is that even in trading we are subject to the
ruthlessness of statistics and this ruthlessness is often at odds with our own
emotional endurance. For example if you have a system with a positive
expectancy this means that on average and over time your system will make
money. But note there are two presumptive phrases involved in this definition –
on average and over time.
You need to have the resilience to ride out the times when the system is
not making money. When traders first encounter the notion of expectancy they
assume that is means that every trade they take will make $X and are surprised
when this does not happen. All trading systems will experience runs of losses,
this is the natural order of things and you can experiment with this for
yourself by looking at a coin toss simulator. If you click here you can see how
streaks of either heads or tails form – this is a good example of what can
happen in trading systems.
Despite trading being a basic exercise in statistics at its core it is an
exercise in resilience because we have to find ways of dealing with brutality
of statistics and even when we know our system is sound it is still hard to
take a continual series of losses. Inevitably we come back to the notion of
courage as a central tenet in the success of any trader.
Author: Chris Tate
This article is concluded with the 3 quotes below:
“Every time you have a
hunch that the market will reverse, jot it down on paper. After 30 attempts,
look back at how accurate your prediction is. You may be surprised by your
results.” – Rayner Teo
“Defeats in trading
are not really defeats, anyway — they are more like trial balloons we keep
sending up, knowing in advance that a certain number of them are going to get
shot down. Therefore, trading is really a process of two steps forward and one
step back. The one step back part will always seem like a defeat, will always
feel like a defeat, but is not a defeat – simply part of the process.” – Andy Jordan
“A large population of
traders consider themselves to be much more effective than they really are.”- Chris Tate
