We get random wrong. I lose several times a day and have lost thousands of times in my career and hopefully will have an opportunity to lose tens of thousands more times. In order for me to continue to trade I have to rationalize the losses. Some are losses and some are mistakes, some are lessons I forgot and some are lessons I did not know.
Our brains want some control, especially if we are risking money and our livelihood. I have spent many hundreds of hours trying to figure out the market. I do think you can get better at it by taking in more variables but even your brain has limits. I assign reasons to market moves as a coping mechanism. It helps me to move on.
I am currently reading “The Science of Fear” by Daniel Gardner. Despite the opening and his liberal use of statistics I like it so far. He uses three examples of how we incorrectly see random.
First exercise he tells the reader to plot 50 random points on a piece of paper. Go ahead, try it, I have a few minutes…
Is figure A or figure B random?
Figure B is more random because the previous point did not determine the future.
Second exercise has to do with lottery numbers. What is more random set of numbers. A:1,2,3,4,5,6 or B: 13,8, 38,14,38. Most people pick B but it is a trick question, they are equally random.
Third exercise involves a flip of a coin, heads=H Tails=T. Assuming the sequence goes H,H,H,H,H what is the next likely coin flip? Most people will say T. For something to be random, the past does not dictate the future. Yes there is a 50% chance of it being heads or tails. But it could take forever to come to balance.
Is the market random? Yes, some of the time. Nothing says it has to make sense, the market promises us few things. Does it stay random forever? No because overtime people act in predictable ways. The problem with randomness and the market is that randomness can lead to big losses.
The market can be random, my actions can not be.
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