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.