Forecasts? I Haven’t Got A Clue …

Small Worlds

We predict things all the time, we can't help ourselves. And in the small world that constitutes our immediate bubble of experience those predictions may have some validity. But in the big world that we inhabit they often don't.  Which of those worlds do you think more accurately represents stockmarket investment?

It's difficult for us to accept that our small world experience doesn't scale up to the big world, but it's often true. To all intents and purposes we're infants teetering on the edge of the volcano: to all intents and purposes we know absolutely nothing worth knowing.

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The Chart Illusion

Timing Dragons

Although, logically, I’ve always felt that the idea of investing by charts should be something on the map between “Dragons” and “Free Lunches” I’ve never been so sure of this as to be outright skeptical. And I know a few smart people who insist that they are at least helpful in timing investing decisions.

Of course, the idea of “timing” anything in investment is fairly ludicrous anyway, but some recent research suggests the whole charting concept does actually help in prediction. Unfortunately what it predicts is a bunch of irrational self-fulfilling behaviour.

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Behavioral Bias 101: #1 Illusory Pattern Recognition

The Man In The Moon

Pareidolia’s that odd moment where you perceive a familiar pattern where none actually exists: it’s the man-in-the-moon, the elephant in the clouds, a religious figure in a pastry. Pareidolia is a specific form of pattern recognition; the human brain is hard-wired to see faces in things, presumably to ensure that babies attend more to other people rather than random bits of plastic.  More generally, though, pattern recognition is critical to human functioning, but has a nasty tendency to go wrong.

Part 1 of 101 Ways To Lose Money

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Pssst … Wanna Invest in a Conspiracy?

The Great Con

There is a great, massive, hideous conspiracy at the heart of modern financial system, designed to steal the ordinary person's money.  Like all of the best conspiracies, it's hidden in plain sight.

And the conspiracy is this: there is no system, no one knows what's going on and no one knows what's going to happen next. Fortunately we can now prove this, although perhaps not quite in the way intended.

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Maladaptive Investing

Integrated Bias

Writing a book about behavioral investing forces you to think about how everything fits together (quick plug: Investing Psychology: The Effects of Behavioral Finance on Investment Choice and Bias).  And one of the things that’s really striking about behavioral bias, when you take this wide angled view, is that it’s less about people behaving irrationally when it comes to finance, and more about finance behaving irrationally when it comes to people.

We evolved in sync with our environment, such that we were adapted to it.  But finance offers an entirely new type of landscape.  We’re maladapted to investing, which is why conquering our biases is impossible.  But recognizing them sure can help.

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Deep Time and the Fallacy of Frequency

Ice Age 6?

There was a time when geologists reckoned that we’d never see another Ice Age. This was when our understanding stretched back only as far as the last one. Then they discovered that there’d been not one Ice Age, but five, stretching away back into countless hundreds of millions of years.

One-off events, even ones as apocalyptic as the general freezing of the world, tend to be ignored: but repetitive ones are viewed very differently. Things that have happened multiple times before may happen again: frequency changes perspectives. Unfortunately the geological view of Deep Time isn’t shared by investors, whose event horizons rarely reach beyond the next quarter.

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