If you heard the term, what would you think?

to be continued ….

Right after “what the heck is psych cap” should come “what the hell is neuroeconomics”? Neuro on one hand and econ on the other? … Could they be more different – microscopic brain cells versus broad based financial interworkings?

Having just received (Thanks Sandy!) my copy of NEUROECONOMICS, Decision Making and the Brain, edited by Paul Glimcher (NYU), Colin Camerer (Cal-Tech) Ernst Fehr (University of Zurich (wonder if our French PhD Chick knows him?)) and Russell Poldrack, UCLA, I personally am all giddy over the avalanche of research demonstrating what I have been karping about for years now – feelings & emotions are part and parcel of all decisions – so we might as well figure out how to use those ephemeral psychological dimensions to our advantage.

To quote (and back to the topic) “Over the first decade of its existence, neuroeconomics has engendered raucous debates…” Raucous debates – over neurons? Really? … well you see, scientific advances typically are met with great resistance. (See Structure of Scientific Revolutions by Thomas Kuhn). In my mind, it was Damasio and Descartes Error that got this field going. He is the now USC neuroscientist (Iowa before) who studies the unfortunate individuals who have had the experience of brain damage that destroys their ability to feel emotion but leaves their cognitive capacities intact.

Neuroeconomics itself however is simply the study of what brain anatomy and functions are happening while we are making decisions that involve financial or social rewards – i.e. money in the former. The idea is that no matter what else anyone wants to theorize, that in the end, seeing what the brain does and how it does it will settle once and for all how our minds really work.

For our purposes it is about how we perceive and react to “risk”. Of course the neuroeconomists (and John Keynes before them) don’t think as traders we are dealing with risk. Risk to them is precise and knowable – i.e. likelihood of drawing an ace in a four-player one deck game of blackjack. Markets however are unknown, imprecise and ambigous – always.

The whole idea of psychological capital is therefore to maximize that side of the “probability” so that the judgments we make regarding the unknown, imprecise and ambigous prices can be the best judgments.

A couple of things to keep in mind

1. The brain assumes the next trade will be the same as the last – which is why you want to press it after winners and get skiddish after losers.
2. The brain knows the difference between card games and markets – even if we try to make markets look like card games. (We are better served to remain conscious that we are trying to trick our innate brain’s ability)
3. An upcoming study will demonstrate that it is the ability to read the other – not the ability to think in probabilities that is the real skill in trading.

…. okay the text is 8.5 x 11 and 500 pages long so they have lots more to say besides that…. but all in all, you might not need to know anymore – despite my personal fascination with the subject.

Okay it’s the name of this blog and a term we banter about but what do we mean? In short, we mean the power of an entire human psyche – intellect, thought, senses, feelings, emotions and energy. Each factor weighs in on the judgment, decisions and performance a trader (or investor) delivers and hence, elevating the whole (psychological capital) and leveraging the dimensions (thought, feeling etc) maximizes the performance a trader can deliver.

Underlying our zealotry for this topic is the reality that so much of our judgment and decisions is based on our senses, feelings and emotions despite society’s general reluctance to believe this. Neuroeconomics knows it. In fact the most highly respected neuroeconomists in the world say “it is not enough to know what one should do, one must feel it.” (Camerer, Lowenstein and Prelec, 2005).

Learning to read internal data – the ping pong between thought and feelings – helps one make better risk decisions. Understanding one’s emotions helps one make better investment decisions (Seo & Barrett,2007)…. so psych cap, simply put, is about using our brains (and psyches) in the way they are designed and to our fullest advantage.

Is there any good reason NOT to do this?

We didn’t believe it at first. We were amazed that traders transferred their deepest emotional architectures and echoes onto the prices… but alas, they do. In fact, just like markets themselves, traders personalities exhibit an effectively fractal pattern wherein they react in the moment as if the situation were from a more important one earlier in life.

It isn’t really all that surprising now that we know. I mean after all, the markets encompass and symbolize competition, winning, money, success and smarts. If you are going to have the fractal like echo of your deepest issues show up anywhere, why would it be somewhere with less stakes?

Which brings me to the question of Madoff…. last year at The Philoctetes Center he said that when he started his career everyone hated him for bringing electronics to the markets – and causing the human brokers to loose their jobs. So now at the end of his career everyone truly hates him again. And in between, he used charm and popularity to create this scenario.

This is how Freud’s Theory of The Repetition Compulsion works (see my paper published in Annals of Modern Psychoanalysis). My opinion? – this ain’t no accident and greed is a sorely insufficient explanation!

At this point I can only conjecture but my conjecture is that it was about the fear of missing out and the fear of being ostracized… the exact things he unconsciously created. This guy, for some reason, recreated being hated. This would leave the question of who hated him early on in his life open… but I for one would bet A WHOLE BUNCH on the idea that someone did.

It is horrid and shameful and everything else. There are a million things to say and that will be said…. but one of the lessons for traders and investors is – understand the emotional drivers behind market, investing and trading decisions. … whether it is you or your manager who is doing the trading …

to be continued. and… tell me I am crazy!

Were you listening to the S&P pit this afternoon? or, just watching the ES trade…. now THAT is the movie of chop and slop. Typical for rollover time – days better spent doing something more productive than trying to catch a decent intra-day trend!

Remember that nasty term from the internet bubble – day trading?

Hushhhhh! NO ONE wanted to be called a “day-trader”. All of those horrid types drove the market up and then drove it down and made everyone go broke…. right? … and they were stupid to boot.

Well day-trading is back …..but is has another name. HIGH FREQUENCY.

…and everyone is doing it. Well, at least everyone with money to trade? – which means hedge funds. Yep it is the dirty little secret of the already secretive world of money runners that one way to make back monies lost on big global macro type events is to trade intra-day.

People stand around newsrooms scratching their heads over these intra-day swings and here is their simple answer. Everyone is a day-trader. In fact if you want to get really technical, minute-trader is a better term.

(… oh yeah, under the full-disclosure rules – I started day trading in 1994. Over the past two days I did 7.82 trades with an average hold time of 3.4 minutes…. )

What is confidence?

Some of the definitions from dictionary.com say -1) full trust, 2) belief in the powers, 3) reliability of a person or thing (the market? your trading strategy?) 4) certitude.

But how is confidence experienced? I mean how do you know you have it or not? In other words, where in your psyche does confidence exist – or leave a vacuum? Is it in your brain or in your body?

You might not able to tell so ask yourself the following and listen to where the answer comes from -How much confidence is there in the new US administration? The credit markets? The equity indices? The Cleveland Browns?

Take the question a step further and ask what is the relationship between confidence and beliefs? How are they the same – or different? And again, ask yourself where you experience a belief – your brain or your body?

In truth the brain and body are of course an intricate machine and the parts can’t really be separated but at the same time, we do experience different psychological events in one or the other. For example, as I type these words, it is my brain that is choosing the order and the spelling but it is effected through my fingers. A third dimension of this is how much confidence do I have that I can or am making sense in my post about confidence. If I feel that it is jibberish, I will rewrite – if I feel it it is clear, I will keep going.

But where does that feeling – the one that either posts or erases – occur?

Because the existence of confidence is so critical to markets overall and to individual decision-making/performance in the markets, it is a useful exercise to examine the experience of confidence in order to be able to use it – or replenish it when it wanes.

We all know it is key to implementing a trading strategy and we all know that when a large segment of the investing population is lacking in it, we have a bear market or a trend-day down. Seen any of those lately?

So, how do you define confidence? Where do you experience it?

well they asked…. and yes we are in a bear market i.e. sell the rallies and buy the dips.

I hated to sound like a downer but hey, Roubini I am not (although so far…. )

MONEY MATTERS on ABC NEWS NOW

Having said that, 900 in the S&P futures held like a rock.

Talking about that on TV was probably a bit too much but to me trading is all about finding the levels that the crowd sees as the proverbial “support” or “resistance” . Then, watch what happens there. How much time do we trade around these levels? Where are people putting their short-term stops above and below? (In other words it is a range around the levels and depending on recent volatility, that range can be wide.)

In fact speaking of stops, part of the reason these levels work is in fact the stop placements entered around key levels. It becomes self-reinforcing (particularly when the time element is added in). High volume nodes on a Market Profile (forgive me CME but I have no way to put an R sign in with this wordpress) work the same way – the volume shows that many traders are involved at that price and very well may defend it – or bail if it goes through.

At Schonfeld I learned that support is meant to be broken so I am always kind of looking for signals that it will be – the trend of the TICK and “Breadth” … both of these cash market indicators can give you a clear heads-up.

well they asked…. and yes we are in a bear market i.e. sell the rallies and buy the dips.

I hated to sound like a downer but hey, Roubini I am not (although so far…. )

MONEY MATTERS on ABC NEWS NOW

Having said that, 900 in the S&P futures held like a rock.

Talking about that on TV was probably a bit too much but to me trading is all about finding the levels that the crowd sees as the proverbial “support” or “resistance” . Then, watch what happens there. How much time do we trade around these levels? Where are people putting their short-term stops above and below? (In other words it is a range around the levels and depending on recent volatility, that range can be wide.)

In fact speaking of stops, part of the reason these levels work is in fact the stop placements entered around key levels. It becomes self-reinforcing (particularly when the time element is added in). High volume nodes on a Market Profile (forgive me CME but I have no way to put an R sign in with this wordpress) work the same way – the volume shows that many traders are involved at that price and very well may defend it – or bail if it goes through.

At Schonfeld I learned that support is meant to be broken so I am always kind of looking for signals that it will be – the trend of the TICK and “Breadth” … both of these cash market indicators can give you a clear heads-up.

The NY Times esteemed Op-ed and they leave out the best part – as mentioned in our earlier post today.

It is all fine and well to notice that we behave irrationally, it is all fine and well to say that some things are Black Swans… what it is NOT fine and well is to ignore the reality of what we now know about decisions… ala our earlier post repeating Dr. Andrew Lo’s message.

As soon as anyone/everyone realizes that we can’t do anything without a feeling, that all decisions have an emotional-basis and that “emotion analytics” are the #1 clue to figuring out what is risky and what is not… or at least what is best… the better off we will all be.

…and besides… one you factor in “affect”, those Black Swans miracously start turning white!