From the book: "But what about the fact that so much of today’s trading stems from algorithms executing on models, and no human really is involved?” But think about it, where did the model and the algo come from in the first place? Sure, we have some rudimentary true machine learning now; but even behind, in a market context, some human somewhere made decisions about implied volatility and assumptions about other factors that they can and frankly often do change. It’s called “recalibrating the model” and it goes on on a regular basis. In other words, the models behind the matrix of electrons began as perceptions and clusters of ideas in human minds. Hence, no matter how computationally complex, cash flow fundamental, technical, or esoteric your analyses are, you still are searching for one thing: Why will anyone pay a different price in the future than you are paying now? Think about it (again). We all have to predict what other people are going to do almost every moment of our lives. Scientists call this mental ability “theory of mind,” or ToM for short. It simply means consciously (or usually unconsciously) working with a theory of what is going on in someone else’s head. In short, it is pattern recognition of likely human behavior.
I'm not sure if you would even get invited, let alone sit at the same table as me. You and I certainly don't share the same "taste".
Exactly. In the longer term. Intraday however, even "intraweek".... it's all math. At least as far as the indexes are concerned. Those algos are backed by unfathomably deep pockets that control the most rigged slot machines of all time. ZDTE options were their greatest gift. The goose that layed their golden eggs. And that is exactly why one must always ask themselves when placing a short term trade... what side of the boat has the most short term money in it. And then play the opposite, because that is precisely what the algos do. Their golden goose. Understanding the psychology of the herd is the most important thing there is imo. Near term at least. Long term, fundamentals rule.
More good stuff, I think the fact we are empaths is a asset in this area of life. Thank you again Schizo! This too “ What is the Keynesian Beauty Contest? The Keynesian beauty contest is a concept from behavioral finance where participants gain by predicting the majority's choice rather than making personal judgments. Applied to stock markets, it suggests that investors profit more by anticipating popular stocks, rather than those with intrinsic value, leading to irrational price fluctuations. The Basic Idea How do you define beauty? You probably have a bevy of individual preferences. If asked, you could likely even give reasons about why you find certain things beautiful. However, if you have ever shared your opinions with other people, you might have realized that your standards of beauty are not universal: one person’s “beautiful” is another person’s “ugly.” Oftentimes, this diversity of preference is a good thing. In the dating world, our diversity of preferences enables everyone to find a partner– it would be pretty difficult if we were all vying for the same few people. But while our varied individual preferences may be useful in finding us a date, they are fueled by an irrational logic that can cause problems elsewhere. The Keynesian Beauty Contest is an early theory in behavioral finance that describes how our perceptions of value can cause irrational fluctuations in supposedly rational systems. More specifically, it describes how short-term stock market fluctuations are not caused by changes in underlying value, but instead by investors attempting to figure out what others think the “average investor” finds valuable. According to this theory, attempting to time market changes is like trying to guess what your friend’s next partner will look like–you make guesses based on what you think they find “beautiful.” And in the same way we often fail to correctly guess our friends’ preferences, the Keynesian Beauty Contest shows that when we try to predict what others find valuable, we often get it wrong. “ Successful investing is anticipating the anticipations of others. – John Meynard Keynes, British Economist Key Terms Bounded Rationality: The concept that human rationality is limited by our cognitive abilities, information, and time. This is in contrast to the assumptions of mainstream economics, which view humans as perfectly rational beings. Herd Behaviour:The mass mobilization of individuals collectively decided to follow each other. Often this occurs without any specific direction or leader and manifests itself in irrational behavior. History In the 1930’s, a popular newspaper game had people guess the prettiest face out of 100 photographs. Readers selected six faces each, and their choices would be compared to all other players’ submissions. If a player’s choices included the most popular face in the pool, they would win a prize. One morning, famed British economist John Meynard Keynes read about this game in his local newspaper. Up until this point, Keynes, while a brilliant macroeconomist, struggled immensely in the stock market. He would try to predict when financial markets would change based on macroeconomic policies he expected to change; but despite knowing more about economics than most of Britain, he still only managed to collect average returns. Due to his failure to reliably predict the market, Keynes was beginning to wonder if doing so was even possible. He, therefore, became interested in finding a model that explained what created rapid stock market bubbles, crashes, and other rapid price fluctuations, despite fundamental value not changing much from the day-to-day. The beauty contest game caught his eye as a potential model, and he proceeded to write about it in his 1936 work The General Theory of Employment, Interest and Money. According to Keynes, you can use multiple different strategies when playing the beauty contest game. First, you could simply pick the six faces that you personally find most attractive. Keynes and other economists call this a “naive strategy,” as it is based on the assumption that your preferences are universal. Another strategy involves basing your decision on what you believe other players will find attractive. This is slightly more rational, however, it operates under the assumption that everybody else is using the naive strategy. But what if everybody else used this more sophisticated strategy, and tried to guess what others find attractive? Well, then it gets complicated. You not only have to guess what other people find attractive; you also have to guess other people’s guesses, too. But once we’ve adopted this strategy, we end up in an infinite loop. To get ahead, each player needs to go one level deeper than everybody else: they need to guess other people’s preferences, and other people’s guesses, and other people’s guesses about other people’s guesses; and so on. While there could be an eventual winner, a simple game of deciding which faces are more beautiful becomes an intricate, infinite guessing game. Keynes likened this form of strategic thinking to the stock market. To make quick money speculating in the stock market, you must buy before everybody else buys and sell before everybody else sells. By doing this, you can ride waves of investor confidence and get out before it inevitably tumbles. Therefore, if you can find out what the majority of players in the stock market were thinking, you can beat them. However, Keynes warns, we typically try to do this using the same flawed, infinite reasoning that we see in the beauty contest. We try to guess what other investors will buy and sell, and what other investors will guess about other investors, and what other investors will guess about other investors; and so on, forever. While it is possible to win big if you guess everything correctly, you are much more likely to lose. Guessing an infinite number of times all but guarantees that you’ll guess wrong at least once. People John Meynard Keynes Perhaps one of the most influential economists of the modern era, John Meynard Keynes pioneered many of the current approaches in modern macroeconomics. In his seminal workThe General Theory of Employment, Interest and Money,Keynes outlined how government stimulus programs could be used to pull countries out of economic recession, which has since become a key tool in handling crises. Furthermore, he was a highly successful investor who studied and wrote about how financial markets operate. https://thedecisionlab.com/reference-guide/psychology/the-keynesian-beauty-contest
Every time I see one of the long-time regulars reply to the ether, I thank Baron for the "ignore" feature Thanks for the quotes, Schizo.
Thanks for the reminder. (But I don't mind distracting myself with the ether once in a while: Hey, can anyone hear me on the other side??!! )