Panics, Limit-Down and Windows…
What do our brains do when a down-trend becomes an avalanche – when
some snow gets rolling at the top and picks up steam and snow and speed
until it hits bottom – with no regard for anything in its way?
Two things to know -
First, it tends to assume it will get the same result from the next
event as it got from the last event. In market terms, this means that
looking at losses predisposes all of us to expect more losses – the
timeframe is basically irrelevant – at least as far as the brain is
concerned.
Neuroeconomics research also indicates that the emotion resulting
from a “first” event also colors any? analysis of the next event -
without us knowing it and before we are conscious of what is happening.
Put the two together in today’s market and the third fact that fear
can easily spread from one person to the next and presto, feelings of
worry turn to fear turn to panic and then morph into limit down.
Interwoven into these human psychological realities, facts like
deleveraging (otherwise known as margin calls) force additional selling
which exacerbates the selling and creates more of the brain’s above
decision cycle.
This is where we are today and the “engineering” behind how the
markets tend to extract the most money out of most of the people.
The opportunity lies in interrupting YOUR brain from taking this trip.
The way to do that is to use what we call EMOTION ANALYTICS.
Researching and dissecting whatever feelings and expectations wash over
you – versus just taking action – gives anyone who tries it a window.
Windows give you the ability to see a more accurate picture to predict
what is really likely to happen next!
Tags: fear, neuroeconomics, panic
Well, I tried my revised inner dialogue, and here’s what I came up with:
Thank you!
One of the problems is that their quant models and their results had them making money. In fact as I understand it, the BSC funds were still churning out cash until Feb. 07.
On the other hand, if “they” were culturally able to listen to their feelings – in this case their intuition (which is a feeling) – then maybe whomever could have done that, would have been able to use common sense as a risk-management tool.
Evidently John Paulson did… so it is humanly possible.
But… alas the fear of missing out takes over….
Just cut and pasted this from a bloomberg article. FYI.
`Psychological Denial’
In his office outside Geneva, about a three-hour drive from Davos and overlooking the French Alps, Schwab says the WEF began issuing warnings in 2003 to investment banks, insurance companies and hedge funds about the systemic risk gnawing at the foundation of the global economy.
“But the financial community didn’t listen,” Schwab says. “They were told that any serious look at the economic fundamentals showed that we were in an unstable situation. It was denial, total psychological denial.”
Yes …
I would add “What are ALL the possible actions I could take” – in other words leave the decision to as late as possible in the process. No action may be the answer.
…and actually I would also say that you don’t really need to worry about #5 because if you go through the first four, your brain will automatically learn.
For most of us… at this stage, making the first four a habit is enough learning for one day
What would be a succinct useful set of questions/inner dialogue to go through when one experiences the physical manifestations of an emotion (feelings)?
Suggestion for your critique:
1. What emotion is this?
2. Where is it coming from; why am I having this?
3. Is it useful for me to take action?
4. If so, what action would benefit myself and others most?
5. What can I learn from this?