I have always been a fan of Decision Theory – the notion of how we make decisions with varying amounts of information has always been fascinating to me. This should seem obvious since trading is a profession that straddles both normative and descriptive decision making. Normative decision is about making decisions with incomplete information whereas descriptive decision making looks at the roe of irrational agents in decision making. Both perfectly describe how traders go about making decisions. My interest is n how people make day to day decisions and how those decisions affect the trajectory of their lives. Based upon my purely anecdotal observations over the years I have come to the conclusion that folks in general make some fairly dumb decisions.
Let me give you an example whilst pottering around the kitchen cooking the other day I spied some property porn on the idiot box and thought this will be handy to have on in the background whilst I cook. The basic premise of the show was that there was a couple who were split on the what to do with their existing home. One wanted to stay and one wanted to trade up and out. To facilitate this decision making a real estate gent is enlisted to show them a series of properties within their budget and an interior designer working to a budget undertakes a renovations of their existing house. What fascinated me on initial viewing was that even when people lived in a shitbox that had asbestos and an outside toilet they would generally elect to stay. Granted after the renovation it was a shitbox with a better paint job but it was still by any dispassionate metric inferior to the properties they had been shown. I thought this to be a one off so I ripped through some more episodes to see and surprisingly it was not. Despite being shown demonstrably superior homes to their own that would have theoretically moved them up the property ladder they still elected to stay.
This emotional inertia is something I have witnessed over and over as people are unwilling to make any form of change to their lives. I accept that change brings tension and tension brings discomfort and people try and avoid discomfort at all costs. The point that has always fascinated me is that there doesn’t seem to be any understanding of the notion that to take no action is an action. And we can generate all sorts of excuses as to why we dont take action at certain times. We have also sorts of comfort phrases such as the devil you know or a bird in the hand is worth two in the bush. I accept that locked somewhere deep in the evolution of our psychology there may be a reason for this but that reason has undoubtedly been lost in the midst of time and all we are seeing now is fear of change, even if this change will alter our lives in a better way.
I see traders undertake the same path in their reluctance to trade – there are people who believe themselves to be traders who never take a trade. Their reasons for this lack of activity are their own but intriguingly they will be the ones who spend all their waking hours on internet forums arguing why your RSI should be set to 9 and not 12 as if that friggen mattered at all. When you elect to do nothing you have by default elected to do something.