When I first came into contact with the world of finance I did so having migrated from a world that was somewhat ruthless when it came to intellectual rigour. My expectation was that finance would be similar after all money is important. instead, I found a world that was resplendent in myths, partial truths, assumptions and half-arsed ideas. Very few of which stand up to any form of scrutiny yet which even today still have enormous currency. Google dollar cost averaging and you will see what I mean – it holds no legitimacy in any form of testing yet it still has an enormous foothold within the investing community because it sounds somewhat sensible. It is a belief system as is much of investing and belief systems lack any form of critical self-assessment. In part, this is because most people in the field are academically lazy but also because we are geared towards accepting stories that sound somewhat plausible.
We put belief in something that sounds about right ahead of thinking about whether it is right, this self-deception is heightened when it confirms an existing bias or belief. Consider the following question. Did more people die as a direct result of the Fukushima nuclear accident or in the month’s following as a consequence of the economic conditions following the accident?
My guess is that your answer will reflect your belief about the safety of nuclear power.
The correct answer is more people died as a consequence of the economic conditions that followed the accident. Apparently, there were no deaths directly attributable to radiation sickness although there are projected to be a cumulative 130 deaths. Some 1,280 additional deaths were recorded during 2011-14. The causal mechanism is thought to be due to a spike in power prices that followed the drop in nuclear power production. This spike in prices lead to people using much less power for heating during the often brutal Japanese winter.
Questions such as this one elicit a response that is built a belief system rather than a logical consideration of the facts. Our belief system overrides facts and intriguingly presenting facts that contradict a belief system seem to have the paradoxical effect of reinforcing a belief.
This problem raises its head in trading as participants are more often than not motivated by a belief about a given instrument. This belief is powered by a narrative that is in some way attractive to the individual, generally because ti confirms an existing belief. Why otherwise would investors hold positions that were collapsing. Consider the daily chart below of the now-defunct ABC Learning.
On the bottom of the chart, I have plotted volume, as you can see there were innumerable opportunities to escape the carnage as the stock began to collapse. Yet intriguingly there were people buying the stock right up until it disappeared from the boards. Such behaviour whilst undoubtedly illogical is reflective of a belief in the narrative not an understanding of the data they are being presented with.
The upshot for traders is that if your life and your trading are belief-driven as opposed to data-driven then you are in for a bumpy ride.