As part of a recent discussion in the Mentor Program we looked at the nature of returns and how they can be distributed in the real world which is very different to how you want them to be distributed in your head. For the conversation I posted the graph below which is a series of monthly returns for one of our systems.
Discussion around these sort of returns are always interesting because they betray some interesting aspects of our native biases. When I post this sort of thing everyone’s eyes are automatically drawn the the three large outliers and the data points in between are missed. All that is seen are the highlights and not the trajectory. There is a pronounced tendency to anchor on these results and only these results, so we lock onto these not as outliers but as inevitable and more common than they actually are. More important we assume that these are the defining elements of the system whilst ignoring other data points. Optimism is a natural thing in people and traders need to be optimistic to keep going but we tend to run head long into the land of optimism bias where we overestimate favourable outcomes. There are a few things about these results that need pointing out. Firstly, the system starts of with a cluster losses and losses are a predominate feature of the system. Secondly, and from my perspective most importantly is the time scale – this was missed by everyone. The outliers come several years into the systems history. Both system and operator have to mature and this process takes time.
This focus bias that occurs when we look at results or charts of any sort is important in developing systems and ideas. Consider the chart below which has two moving averages on it.
The eye is naturally drawn to the to the final third of the screen where we have a sharp lift and then collapse. We see that for this instance the moving averages did a good job of capturing the move. Our brain then makes a leap and assumes that these moving averages will capture every move and in isolation if every move where like this then they would. However, price does not move in a sine wave, it is dirty, lumpy and chaotic. Conditions that do not suit moving averages very well./ If you look at the above chart again you instances where the crossovers went nowhere or simply cycled through congestion. The central issue is that we did not evolve to trade – we evolved to survive by seeing patterns and perceptions of movement. It is natural that our psychology is geared to maximise this sort of behaviour but in trading it can lead us to make false conclusions or to see things that are not really there. Or which perhaps require much closer and thoughtful inspection.
I found this fascinating and it had me drawing bikes on a blank piece of paper. The central issue is that we actually know less about he world than we think we do. These errors abound in simple tasks and in our understanding of the way the world works. It is natural therefore that such errors creep into the way we think the market works and the way it actually does work. More importantly such errors will creep into the way we think we operate and the way we think we operate in concert with the market.
This question has attracted scientific research for more than a century. In fact, the first empirical study of this issue was published in 1835. Thus, I can offer a confident answer: not quite! At least not if creativity is assessed by productivity or by making original and valuable contributions to fields such as science and art. By that measure, output first increases in our mid-20s, climaxes around our late 30s or early 40s, and then undergoes a slow decline as we age. A person’s single best work tends to appear at roughly the same age as their output peaks. But their expected creative productivity at 80 will still be about half of what it was at that high point. Whether you view that as a significant drop or not depends on whether you see the glass as half empty or half full.
More here – Scientific American
Melvyn Bragg and guests discuss Miguel de Cervantes’ 17th century novel, Don Quixote. Published four hundred years ago in Madrid, the book was an immediate success and recognised as one of the classic texts of Western Literature, revered by writers such as Sterne, Goethe, Flaubert, Dostoevsky, Kafka and Melville. Don Quixote tells the story of an unlikely hero – an impoverished country gentleman who goes mad from reading too much and decides to put the world to rights by becoming a knight errant. And so the Knight of La Mancha tilting at windmills with his portly squire astride a donkey is one of the most enduring images in the popular imagination but the simple comedy of the affair belies the fantastically complex, beguiling and sophisticated story on which it is based. As Don Quixote’s delusional chivalric ideals bump up against the humdrum of reality and the views of his more earth-bound companion, Sancho Panza.
So how has the book endured over the centuries? What was the relationship between Cervantes’ work and the world of 17th century Spain in which he lived? In what ways was Don Quixote an interpretation of the age which hitherto had not been articulated? And can it live up to the claim that it was the first European novel?
With Barry Ife, Cervantes Professor Emeritus at King’s College London; Edwin Williamson, Professor of Spanish Studies at the University of Oxford; Jane Whetnall, Senior Lecturer in Hispanic Studies at Queen Mary, University of London.
Click the image below