The Invisible Gorilla – Inattentional Blindness

I listened to a podcast yesterday on my run around Lady Bird Lake from Motley Fool Money.  (you can find the podcast here) They had on the podcast three authors of three books that dovetails perfectly with what I am thinking these days about my trading. The first guest/author was Carl Richards who wrote ‘The Behavior Gap’, the second was Christopher Chabris who wrote ‘The Invisible Gorilla‘ and finally Dan Ariely, the author of many books on our tendency (really not a tendency, but an inclination) to be irrational.

I’ve previously read Dan Ariely’s first book ‘Predictably Irrational’ so I am putting him aside for the moment but I got my hands on ‘The Invisible Gorilla’ and started in on it and admittedly I am just on the first (of six) chapters. All of this is in service of my selfish pursuit of learning how to be a better trader, of being able to set aside harmful thought processes and false intuitions in order to perceive reality just a bit better. I’m betting that if I can get a firmer grip on reality, I’ll make better trading decisions.

So far what I’ve learned is that we suffer from an illusion of attention. We think we see and are aware of out surroundings, but in reality if we are not expecting something to be in front of us (like a gorilla on a basketball court, a motorcycle turning in front of us, or a plane on a runway we are set to land on) then about half the time we won’t see it. This is especially true when we are engaged in a task requiring our attention.

Chabris will go on to discuss 5 more illusions we suffer from but it is the last one that I am looking forward to reading about and that is the illusion of cause and effect. We, as humans, really like to construct stories about what has happened in the past and to ‘connect the dots’ even when it makes no sense. I see that this as having great implications for investor behavior. The financial pundits love to create stories to explain a stock’s rise or fall, when I have found many times the movement defies logic.

When the stories don’t make sense, the pundits say that the stock is no longer trading on fundamentals, but is trading technically.

As I said yesterday I am going to limit my exposure to CNBC during the trading day, but one of the pundits I refuse to give up is Josh Brown of The Reformed Broker. So for that reason I will still watch the Fast Money Halftime Report. If you haven’t read his blog, its the best there is in the world of finance. His most recent blog about investor behavior (which you can read here) is just priceless.

Happy Birthday USA! Goodbye @CNBC, Hello @BloombergTV

This week I witnessed something on StockTwits that really caught my eye. There is a user named Paul that has been a fairly active writer (poster? tweeter? I don’t know the correct term) about the movement of $AAPL. He was around in the fall of last year when the stock was trading in the mid to high 400’s. (before the split, of course). He was an adamant advocate of buying and holding the underlying stock, which as we know was a good strategy in hindsight. This strategy is in sharp contrast to me as I trade options almost exclusively with the calendar diagonal being my favorite strategy.

I noticed over the last month that Paul had discovered the power of options in that they can provide massive leverage and he was advocating buying October calls predicting that this would capture new product announcements. For the record I agree and I own a fairly hefty position of $AAPL calls that expire not only in October but in January 2015 as well as some in August, which will also capture the next earnings announcement. One difference in our strategy is I am ALWAYS short some near dated calls, and in this case I am short calls that expire July 19 and then on July 25. But I digress. . . . . .

As Paul started more aggressively advocating his long position, he PREDICTABLY started being challenged. If in the short term things didn’t go the way he predicted he was being slammed and some of the posts were ad hominem attacks. If you spend any time on StockTwits you know the community will pound on you mercilessly when you are wrong, but rarely give you kudos when you are right. Paul was the recipient of such treatment.

One morning this week Paul was looking to get some more followers. Why I am not sure, but maybe because when someone follows us, we feel affirmed in our value to the community. But 12 hours later Paul posted that he was closing his StockTwits stream as the hatefulness had gotten to be too much. Wow. What a quick turnaround . . .

Witnessing this drove the point home to me that trading is primarily an emotional experience. How we feel drives what we do. Some anonymous jerk with absolutely no “skin in the game” can post something on StockTwits that totally changes our thoughts about the market in general and individual stocks in particular. When your thoughts change, you trade based on how you feel, sometimes right but many times wrong.

As time goes on, I get more and more dispassionate about my trading. I am less certain about the direction of any particular name but try to take advantage of short term trends. You won’t see me telling anyone on StockTwits that any particular name is going to take off, or tank.

Paul’s story has reinforced to me that if you listen to what others say, it can have a profound effect on your emotions. Your emotions drive your trades. I don’t get attacked on StockTwits because I make very few predictions, so I don’t hear the noise and I think I trade better for it. But what I do hear every trading day is the tv and SiriusXM and for the last 8 years that has primarily been CNBC. This week I have decided to severely limit my exposure to them as I believe they try to either frighten me or to anger me because if you are frightened you feel you have to continue to watch as they will then give you a heads up about danger ahead. Anger just feels good but it also blinds you to reality, so you continue to watch. I’m going to switch to Bloomberg as, at the moment, I think they are merely more informative and less hyperbolic. I’ll still watch Fast Money Halftime but mostly because Josh Brown is on there, and I trust his analysis more than most others.

Will it make a difference? I’ll just have to wait and see. . . . . . .