DISQUS

jmf · 6 months ago

Moin from Germany,

speaking iof herding.......

http://www.youtube.com/watch?v=GA8z7f7a2Pk

Edward Harrison · 6 months ago

hilarious! Thanks for that.

Wag the Dog · 6 months ago

Nice. But we need special visualization software to see the same thing happening on the stock market:
http://www.youtube.com/watch?v=OSBn07ftlV8

Regarding the observation that very few bears can hold that outlook for long, I think this is an application of Kahnemans "Simulation Heuristic" and its effect on counterfactual thinking (i.e. regret).
http://www.psychwiki.com/wiki/Simulation_Heuristic
Seeing more and more of your peers reaping rewards on what may be no more than a sucker rally makes it easier to simulate in your mind yourself doing the same thing as they did in the past. However, Kahneman's original research demonstrated that one regrets consequences of action more than inaction, so shouldn't this mean bears tend to stay bearing and bulls tend to stay bullish?

Prospect theory also comes into play. Aversion to a loss increases when one can more easily imagine making that loss. Missing the bottom of the market is becoming easier and easier for everyone to imagine, despite there being little substantive change in the underlying fundamentals. A study of penalty shootouts concluded that the goalie was more likely to take action by moving despite the fact that statistically he was more likely to prevent a goal being score if he simply stayed put.
http://tutor2u.net/blog/index.php/economics/com...
It was easier to mentally simulate being blamed for a goal scored against his team when he took no action, than when he did at least go through the motions of trying.

Economist's subconscious qualification of all their statements with words like "might" and "could", can be likened to loss avoidance in decision making. Behavioral economist, Daniel Ariely, explains this effect in his chapter on "Keeping doors open":
http://www.youtube.com/watch?v=RpvpCLI5wxE
So when choosing to be bearing, one cannot help but devote some resources to the bullish argument every now and then, and vice versa.

Stevie b. · 6 months ago

Ed - thoroughly enjoyed this post and having done the test I now understand myself a bit better than I did. More importantly, I think your point about consensus is well made. These days, the performance of portfolio managers seems tied to one index or another and they're thrilled if they gain a percent or 2 relative to the benchmark. As the decades flew by on my Wall St. "career", I can see now after reading your comments that I became more contrarian and more isolated because I was determined to remain a contrarian even though the actions that such a stance led me to were sometimes premature/mis-timed/wrong. Thank god I didn't have to perform to any benchmark other than the risk profile of the client - and usually that profile fitted with my own. Like definitely attracted like.

I am still fiercely of the view that the only way to less risky portfolio success is by ploughing one's own contrary furrow, where the greatest risk is picking that optimum moment to act in a contrary manner - it's not exactly an exact science. But hell, if you can make say 30 to 40% in the first flush of the sort of relief rally we've had lately, who cares if you were out for years beforehand or don't get back in for years afterwards - but that attitude doesn't pay Wall St salaries, hence consensus.

Edward Harrison · 6 months ago

Stevie, you make the case for following the "Wisdom of Crowds" except in extreme cases like the one we have just seen. I would say that is exactly what most good stock pickers do. They don't make 'regular' contrarian calls but rather they focus on those places where their call can make them money.

Stevie b. · 6 months ago

Ed - for me, being a contrarian meant taking a 1-to-3 year view buying stocks that were out of favour using fundamental analysis, coupled with technical analysis to clearly define the risk. Charts were absolutely essential in reflecting patterns of behaviour, and in fact for years I used to lecture on the basics of how to read them to all new brokers worldwide outside of the US at Mother Merrill, so clearly ML thought they were of some importance too. I say "were" essential cos I'm sure these days they're manipulated more than they used to be, but I'd guess one can make allowances and adjust accordingly.

Joel · 6 months ago

Always enjoy reading your posts Ed. I couldn't agree more that psychology isn't factored in to economic forecasting nearly enough. In fact, not just forecasting but economics as a whole. If enough people believe something (i.e. house prices have bottomed) then they will prove correct, at least in the short-term. This reinforces people to stick with the herd and we are left with fewer people willing to reach their own conclusions.

I also would hazard a guess that NT personality types are over represented amongst people who read this blog. I am INTJ.

Stevie b. · 6 months ago

"I also would hazard a guess that NT personality types are over represented amongst people who read this blog. I am INTJ."

Joel - could be a good call - me too.

kfizzle · 6 months ago

Great post Ed, definitely food for thought.

mikemasland · 6 months ago

Well done. This is one of my favorite posts of all time. Long time reader, first time poster.

Benedict@Large · 6 months ago

Interesting.

Of course, everyone knows what "herding" means from the first moment they hear the term. It's another thing entirely to envision a dynamic for it, and this one seems quite reasonable.