Credit Writedowns - Latest Comments in The psychology of economic forecasting

Re: The psychology of economic forecasting

Wag the Dog — Mon, 15 Jun 2009 04:21:00 -0000

Nice. But we need special visualization software to see the same thing happening on the stock market:
http://www.youtube.com/watc...

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/wi...
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/ind...
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/watc...
So when choosing to be bearing, one cannot help but devote some resources to the bullish argument every now and then, and vice versa.

Re: The psychology of economic forecasting

Edward Harrison — Fri, 12 Jun 2009 07:45:00 -0000

hilarious! Thanks for that.

Re: The psychology of economic forecasting

jmf — Fri, 12 Jun 2009 07:34:00 -0000

Moin from Germany,

speaking iof herding.......

http://www.youtube.com/watc...

Re: The psychology of economic forecasting

Stevie b. — Fri, 12 Jun 2009 04:09:00 -0000

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.

Re: The psychology of economic forecasting

Stevie b. — Fri, 12 Jun 2009 03:39:00 -0000

"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.

Re: The psychology of economic forecasting

Benedict@Large — Fri, 12 Jun 2009 01:19:00 -0000

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.

Re: The psychology of economic forecasting

mikemasland — Thu, 11 Jun 2009 23:19:00 -0000

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

Re: The psychology of economic forecasting

Anonymous — Thu, 11 Jun 2009 20:59:00 -0000

Great post Ed, definitely food for thought.

Re: The psychology of economic forecasting

Joel — Thu, 11 Jun 2009 19:37:00 -0000

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.

Re: The psychology of economic forecasting

Edward Harrison — Thu, 11 Jun 2009 18:04:00 -0000

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.

Re: The psychology of economic forecasting

Stevie b. — Thu, 11 Jun 2009 17:56:00 -0000

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.