10 Ways Wall Street Brainwashes You

Discussion in 'Psychology' started by ShoeshineBoy, Jul 17, 2008.

  1. Interesting link that is written to investors, but I think definitely applies to traders as well:


    It talks about some, 11 I guess to be exact, of the common psychological barriers that the market throws at us. There's a video in there but I haven't watched it.

    11 ways Wall Street brainwashes you

    We all like to think of ourselves as the masters of our thoughts, but our brains work in ways that leave us vulnerable to being duped, even when we know it's happening.

    Latest Market Update
    July 17, 2008 -- 14:05 ET

    Yes, Wall Street's got a great con game going, but it works only because its 95 million investors are willing victims who love playing along, actually letting Wall Street get away with it.

    I call it "Brainwashing 101 for Dummies." Insiders use fancier terms, such as neuroeconomics, behavioral finance and the science of irrationality.

    Regardless of what you call it, you're being brainwashed. Wall Street's laughing all the way to the bank at how easy it is to dupe gullible investors. But I've got the 11 rules of Brainwashing 101 for Dummies for you -- everything you need to know about the big con.

    A little history first, though. True story: The new science of neuroeconomics began on Dec. 21, 1954, the day Marian Keech, the leader of the Brotherhood of the Seven Rays, a UFO cult, predicted a massive flood would destroy Earth. Keech received messages from the Guardians on planet Clarion. Their spaceships would come and save her true believers.

    No surprise: No flood and no alien spaceships. And no admission from Keech that she was wrong. Just the opposite. One source wrote that Keech was "elated" and that she told how she'd received "a telepathic message from the Guardians saying that her group of followers had spread so much light with their unflagging faith that God had spared the world from the cataclysm."

    In "Buying In," Rob Walker's book on neuromarketing, we learn that psychologist Leon Festinger had predicted Keech's bizarre claim. She "had invented, on an unconscious level, a rationale for their behavior that justified it despite clearly contradictory evidence."

    Our brains: Our worst enemies?
    Clever! But it's not just Keech. Everybody's brain operates on a preprogrammed guidance system. We create subconscious "rationales" so compelling that facts that contradict them are usually rejected. Our brains dismiss new information that doesn't fit neatly into our ideas of reality. Or we block new stuff, not even really seeing it. Or, as Keech did, our all-to-clever brains will reinterpret contradictory data to fit into our old belief systems.

    And that, my friends, was the birth of neuroeconomics, showing that the investor's brain is easy to brainwash. Our heads can be our worst enemies, saboteurs tenaciously holding on to old ideas no matter how destructive to our economic interests.

    Festinger labeled Keech's behavior "cognitive dissonance." And it works because, as Walker succinctly puts it, "The vast majority of our brain's activities -- 98% of it, by one estimate -- happens outside of conscious awareness." In other words, investors are easy-to-manipulate zombies.

    Here's how that translates into Wall Street's new Brainwashing 101 for Dummies: Virtually all so-called rational decisions are made in the investor's subconscious mind. You do not think rationally. Instead, you are guided by rationales, including your beliefs, ideologies and principles.

    Recently I reread "Why Smart People Make Big Money Mistakes," in which Gary Belsky and Tom Gilovich lay out 10 simple principles. "Big Money Mistakes" is one of the best early books describing neuroeconomics for a popular audience. Way back in 1999, hidden in plain sight -- in a book intended to help America's investors understand their brains and thus make more rational investments -- was the big secret Wall Street needed to get richer.

    What a lethal weapon! Belsky and Gilovich were handing Wall Street what the Pentagon calls a "psych-ops" war strategy. The authors had provided a 10-part profile of the brains of the 95 million investors playing the stock market. Now Wall Street's quants could develop esoteric algorithms to brainwash and manipulate Main Street investors.

    Yes, folks, investors are still like Keech's seekers, still willingly playing Wall Street's game by Wall Street's rules, making Wall Street richer. That's Brainwashing 101, and here are 11 reasons you willingly let them take advantage of you:

    1. You know you're (almost) never wrong.

    "Big Mistakes" calls it "confirmation bias," another name for cognitive dissonance, the unconscious need your brain has to stick with what you already know as The Truth (even when it's been secretly planted there by Wall Street's clever ad campaigns).
  2. 2. Your "mental accountant" is an embezzler.

    Your brain loves so-called mental accounting. A dollar looks different "depending on where it comes from, where it's kept, or how it's spent," notes "Big Money." You spend tax refunds fast, but you hang on to stock inherited from Grandma. Wall Street's marketing gurus know the way into your pocket is through that unconscious 98% that's manipulating your brain's accounting system.

    3. You hate to lose more than love to win.

    Psychologists call it "prospect theory." We investors hate to lose so much we often sell winners to lock in profits. But we hang on to losers, praying for a miracle.

    4. You throw good money after bad.

    Here's a familiar example: First blunder, pay too much for a house. Second, fail to get out at the top. Third, turn down a bid because it's less than you paid. You're stuck paying down a big, bad mortgage instead of cutting your losses.

    5. Decision paralysis keeps you from acting.

    How your brain labels options changes the outcome: Whether it's "one of rejection or one of selection, or whether you view it as protecting a gain or avoiding a loss," says "Big Mistakes." Labeling confusion leads to decision paralysis: Your brain locks up, doing nothing, and you lose again.

    6. You don't sweat the small stuff.

    With bigness bias, you ignore small numbers such as brokerage commissions and fund fees. Big mistake. This is why more Wall Street bankers, brokers and fund managers own more yachts and make dozens of times more than the average clueless investor.

    7. You focus on things that matter too little.

    Like a cruise missile, your brain locks on anchors, specific events that loom big in your brain, blinding you to important stuff. If you focus too much on a major catastrophe like the dot-com crash, you might ignore the power of compounding and dollar cost averaging in building long-term wealth.

    8. Your biggest saboteur is overconfidence.

    The investor's No. 1 mistake: You think you know more than you do and have all the skills to beat the averages. Wrong. You're no match for the high-tech quant traders buying and selling millions all day long.

    9. Follow the herd -- into the sea.

    The trend is not your friend. Yet you insist on following the other sheep, even when you know they're also being manipulated. You buy at the top and sell at the bottom, losing at both ends. And Wall Street gets rich off your naiveté.

    10. Yes, you can know too much!

    Information overload is a killer, confusing your brain. In his bible, "Advances in Behavioral Finance II," professor Richard Thaler says Wall Street "needs investors who are irrational (and) woefully uninformed." Wall Street's goal is to keep you that way. The Street panders to your delusions of superiority because that makes you vulnerable.

    11. The joke's on you. Knowing new rules makes brainwashing easier.

    This is the most amazing outcome of all: Since 1954, despite all the brain profiling in great books like Belsky and Gilovich's and with Daniel Kahneman's 2002 Nobel Prize in economics for exposing Wall Street's myth of the "rational investor," today investors are even more willing to let Wall Street take advantage of them, making Wall Street richer.

    Investors live in a self-induced trance world. That's why I call neuroeconomics Brainwashing 101 for Dummies.
  3. I think that would be quite true, and interesting indeed!
  4. Yes, that was an interesting comment. It might be possible to find a trigger point on a couple of the sector leaders which would then take down the whole sector. Everything moves so much in tandem now...
  5. Like anything else Wall Street has conventional investing ideas. The phrases a broker might use or standard media fare. Then you have the an unconventional side, perhaps contrarians in its simplest form or short sellers, still conventional though.

    Then you have the unconventional unconventional, the contra contrarians, the mavericks and independents, people who come with there own ideas but unable to confirm their ideas in the general. They are alone.

    They struggle with "Do people do this?" and often abandon ideas for fear of ridicule or being unconventional only to find out later on, there really is nothing new under the sun. Someone has done it before.

    If you have an idea, go for it, try it.
  6. eagle


    The problem with #3 is that very often a winner turned into a loser. Afraid to see this repeated scenario, the trader exited.
  7. This is my part of my rant against Technical Analysis purveyors

    ---- Despite the fact that perhaps 90% of new traders lose their money and probably 90% of them focus on TA

    ---- Despite the fact that piles of serious studies show little value in Elliot Wave, Fibonacci Numbers, Indicators, and most other Technical Analysis

    ---- Despite the posts and thoughts from some who said they tried TA and could not make it work

    ---- Despite the claims of those who "know someone it worked for" - which is the textbook argument of a fallacy

    ---- Despite the fact that most cannot get it to work for their own trading for a significant length of time

    The TA lovers rant and rave against any thoughts to the opposite, because they JUST KNOW IT MUST WORK. Because they BELIEVE IN IT.

    And the books keep selling and the trading systems keep selling and the lemmings keep marching and the brokers keep promoting it and the traders keep losing

    Show a TA lover a study of 100 indicators that pretty much don't work, they will pick the top few and say WHAT ABOUT THESE? The statistical fact that a few most be on top, even if all 100 are random, does not dissuade them.

    Learn things that work based on rigorous testing, not rigorous beliefs. Or learn to read price action, people.
  8. I believe you are partially right. But the problem is that their studies cannot be exhaustive nor can they evaluate different techniques for different markets. Example: Dan Zanger simply made too much money too quickly for it to be "luck".

    Now it's true he struggled post-bull from what I heard. But during the bull his technique worked unbelievably well. Winner after winner after winner and he made a small fortune.

    So my point is that during certain market conditions, certain TA techniques work and work extremely well.

    So TA can be used very successfully if one can determine what markets are in what state. And my guess is that that's the difference between the guys who make it and who don't imo in trading...
  9. What is this dogshit? All 10 alleged brainwashing ways are really the same - the comfort of being/doing/going along with others. So what?

    Make your own judgement every time. And make it a habit. :cool:
  10. Well said, I also believe TA is based in laziness, why would you do a great deal of homework each night when you can simply pull up an indicator.
    #10     Jul 19, 2008