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Todd Harrison: Janet Yellen, Bank Stocks, Smart Money, and Cognitive Biases
Digesting another round of information overload.
Todd Harrison    

Editor's Note: Todd posts his vibes in real time each day on our Buzz & Banter where subscribers can follow over 30 professional traders as they share their ideas in real time. Want access to the Buzz plus unlimited market commentary? Click here to learn more about MVPRO.

The Hump Day cometh and with it, a new round of news, information, catalysts, and communication has arrived. In the interest of respecting your time, I'm gonna dive right into some Random Thoughts, in no particular order:

  • Janet Yellen was on the tape earlier saying that a "high degree of accommodation remains warranted" with respect to quantitative easing. The reaction to news is always more important than the news itself, and it's worth noting that the tape didn't knee-jerk higher on the headline.
     
  • The Russell 2000 (INDEXRUSSELL:RUT) closed below the 200-day yesterday (RUT 1114), which is the first time that happened since December 2012. The all-important banks, for their part, are attempting to hold BKX (INDEXSP:BKX) 67, the 200-day, and a triple-bottom.
     
  • Note the potential head-and-shoulders formation on the BKX below, as well; IF (big if) it breaches BKX 67, a measured move "works" to BKX 60, or 10% lower, through a pure technical lens.

  • It's amazing to me that Twitter (NYSE:TWTR) now has the same market cap as what Facebook (NASDAQ:FB) paid for WhatsApp.
     
  • Market breadth on the NASDAQ Composite (INDEXNASDAQ:.IXIC) is 3:1 negative, but it only skewed negative on the Big Board (not yet a "tell").
     
  • I cleaned up (read: flattened) my remaining GW Pharma (NASDAQ:GWPH) yesterday, which was more housekeeping than trading (I sold the bulk last week). I'll look to buy it back lower if and when I'm given the opportunity.
     
  • SSE Composite Index (SHA:000001) 1985, Nikkei 225 (INDEXNIKKEI:NI225) 14K, and DAX (INDEXDB:DAX) 9K are still levels to watch, if and when.
     
  • I believe volatility will expand, and the proactive measure to address that is to trade smaller size.
     
  • I recently came across a terrific article that addressed 12 cognitive biases that prevent human beings from behaving rationally. As perception is reality in the financial markets, I thought it might be useful to address those issues through the lens of a trader.

    1. Confirmation Bias

    This is a fatal flaw of trading. We tend to surround ourselves with information that validates our own point of view and dismiss input that conflicts with our reasoning (also known as cognitive dissonance). This is the primary reason why we always strive to see "both sides of every trade," as the residual grist between variant views is where education -- and profitability -- resides. 

    2. In-Group Bias

    This is a manifestation of confirmation bias, or the tendency to surround ourselves with those who share similar takes on the tape. This could pertain to our physical environment or a virtual experience, such as Twitter. Not only does this provide a false sense of security in our individual viewpoints, it makes us suspicious -- or angry -- with outsiders who dare to question how we feel. (See also: The Gold Scold.)

    3. Gambler's Fallacy

    One of the most famous disclaimers in finance is that past performance is no guarantee of future results. This bias is often referred to as a "glitch" in our thinking in that it extrapolates what happened in the past to construct an idea of what will happen in the future. How many of you have played roulette at a casino under the premise that a string of red increases the likelihood of a black outcome? That's flawed thinking; the odds of red (or black, for that matter) are 48% on each independent spin.

    4. Post-Purchase Rationalization

    One of our Ten Trading Commandments is that the definition of an investment should never be a trade gone awry. Nobody initiates market exposure expecting to lose money, but we should never post-rationalize our risk (such as ignoring stop-losses or throwing good money after bad). We would be wise to remember that good traders know how to make money, but great traders know how to take a loss.

    5. Neglecting Probability

    History is littered with stretches where in hindsight we're reminded not to confuse brains with a bull market. This bias limits our ability to properly assess risk, whether it's overstating an unlikely event (such as buying a stock for a takeover) or understating an unlikely event (such as Y2K, the fiscal cliff, or a terrorist attack). Tail events do happen, of course, but betting on an outlier is a long shot by its very definition.

    6. Observational Selection Bias

    This is when we suddenly notice something we haven't noticed before and wrongly assume the frequency has increased (when it hasn't). Let's say I bought cannabis stocks as a way to play (what I perceive to be) the legalization of marijuana. All of a sudden, everywhere I look, there are more and more signs that support my thesis; the topic is featured on 60 Minutes, it's a hot-button issue during the election, it gains momentum in the mainstream media. While some of that may prove true, I'm on the lookout for news, whether it's conscious or not.

    7. Status-Quo Bias

    Most of us are creatures of habit in our own way. We use the same toothpaste or align with a particular smartphone device. That routine often extends to our investments in the marketplace: We're comfortable with the stocks (or indices) we often trade and often miss opportunities outside of that comfort zone for fear of the unknown. Change isn't only positive -- it's inevitable.

    8. Negativity Bias

    Let's face it: We live in a sensationalist society where scare tactics and negative headlines garner the most attention. If you doubt this for a minute, turn on your local news tonight. Scientists theorize that we perceive negative news to be more important than positive news. The risk -- for the bears and for humans as a whole -- is the tendency to dwell on bad news rather than embrace good news, and there's the added twist that the stock market is widely considered to be a leading indicator.

    9. Bandwagon Effect

    How prevalent is this when it comes to the financial markets? They teach it in college as a stylistic approach (momentum investing)! Nobody in our business, or in the media, wants to miss a move in the stock market, and history is littered with bubbles and busts that demonstrate this bias in kind. In life, this is driven by our innate desire to "fit in and conform"; in the markets, it's driven by two factors: fear and greed.

    10. Projection Bias

    This is predicated on projecting our thoughts and beliefs onto others and assuming that others are wired the same way (they're not). This can lead to "false consensus bias," which not only assumes that other people think like we do, but that they reach the same conclusions. In short, this creates a false consensus, or sense of confidence, when in fact one doesn't, or shouldn't, exist.

    11. The Current-Moment Bias

    This is a direct descendant of the immediate gratification mindset that dominated society for many years -- and some will argue that the government is currently operating in this mode, mortgaging our children's standard of living to achieve short-term fixes. In short, we want to live as well as possible and pay for it at a later date (as evidenced by the level of debt and our growing deficit). The housing crisis was rooted in this bias, as is the basic concept of leverage.

    12. Anchoring Effect

    This tendency, also known as the relativity trap, compares a situation to a limited subset of information; it's when we focus on a number or value and extrapolate it to a current situation. This often manifests in the marketplace through the fundamental metric, when we observe that a stock is "cheap" relative to its peers or a historical precedent (also known as a "value trap").
R.P.

Twitter: @todd_harrison

Follow Todd and over 30 professional traders as they share their ideas in real time with a FREE 14 day trial to Buzz & Banter.
< Previous
  • 1
Next >
No positions in stocks mentioned.

Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at todd@minyanville.com.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

Todd Harrison: Janet Yellen, Bank Stocks, Smart Money, and Cognitive Biases
Digesting another round of information overload.
Todd Harrison    

Editor's Note: Todd posts his vibes in real time each day on our Buzz & Banter where subscribers can follow over 30 professional traders as they share their ideas in real time. Want access to the Buzz plus unlimited market commentary? Click here to learn more about MVPRO.

The Hump Day cometh and with it, a new round of news, information, catalysts, and communication has arrived. In the interest of respecting your time, I'm gonna dive right into some Random Thoughts, in no particular order:

  • Janet Yellen was on the tape earlier saying that a "high degree of accommodation remains warranted" with respect to quantitative easing. The reaction to news is always more important than the news itself, and it's worth noting that the tape didn't knee-jerk higher on the headline.
     
  • The Russell 2000 (INDEXRUSSELL:RUT) closed below the 200-day yesterday (RUT 1114), which is the first time that happened since December 2012. The all-important banks, for their part, are attempting to hold BKX (INDEXSP:BKX) 67, the 200-day, and a triple-bottom.
     
  • Note the potential head-and-shoulders formation on the BKX below, as well; IF (big if) it breaches BKX 67, a measured move "works" to BKX 60, or 10% lower, through a pure technical lens.

  • It's amazing to me that Twitter (NYSE:TWTR) now has the same market cap as what Facebook (NASDAQ:FB) paid for WhatsApp.
     
  • Market breadth on the NASDAQ Composite (INDEXNASDAQ:.IXIC) is 3:1 negative, but it only skewed negative on the Big Board (not yet a "tell").
     
  • I cleaned up (read: flattened) my remaining GW Pharma (NASDAQ:GWPH) yesterday, which was more housekeeping than trading (I sold the bulk last week). I'll look to buy it back lower if and when I'm given the opportunity.
     
  • SSE Composite Index (SHA:000001) 1985, Nikkei 225 (INDEXNIKKEI:NI225) 14K, and DAX (INDEXDB:DAX) 9K are still levels to watch, if and when.
     
  • I believe volatility will expand, and the proactive measure to address that is to trade smaller size.
     
  • I recently came across a terrific article that addressed 12 cognitive biases that prevent human beings from behaving rationally. As perception is reality in the financial markets, I thought it might be useful to address those issues through the lens of a trader.

    1. Confirmation Bias

    This is a fatal flaw of trading. We tend to surround ourselves with information that validates our own point of view and dismiss input that conflicts with our reasoning (also known as cognitive dissonance). This is the primary reason why we always strive to see "both sides of every trade," as the residual grist between variant views is where education -- and profitability -- resides. 

    2. In-Group Bias

    This is a manifestation of confirmation bias, or the tendency to surround ourselves with those who share similar takes on the tape. This could pertain to our physical environment or a virtual experience, such as Twitter. Not only does this provide a false sense of security in our individual viewpoints, it makes us suspicious -- or angry -- with outsiders who dare to question how we feel. (See also: The Gold Scold.)

    3. Gambler's Fallacy

    One of the most famous disclaimers in finance is that past performance is no guarantee of future results. This bias is often referred to as a "glitch" in our thinking in that it extrapolates what happened in the past to construct an idea of what will happen in the future. How many of you have played roulette at a casino under the premise that a string of red increases the likelihood of a black outcome? That's flawed thinking; the odds of red (or black, for that matter) are 48% on each independent spin.

    4. Post-Purchase Rationalization

    One of our Ten Trading Commandments is that the definition of an investment should never be a trade gone awry. Nobody initiates market exposure expecting to lose money, but we should never post-rationalize our risk (such as ignoring stop-losses or throwing good money after bad). We would be wise to remember that good traders know how to make money, but great traders know how to take a loss.

    5. Neglecting Probability

    History is littered with stretches where in hindsight we're reminded not to confuse brains with a bull market. This bias limits our ability to properly assess risk, whether it's overstating an unlikely event (such as buying a stock for a takeover) or understating an unlikely event (such as Y2K, the fiscal cliff, or a terrorist attack). Tail events do happen, of course, but betting on an outlier is a long shot by its very definition.

    6. Observational Selection Bias

    This is when we suddenly notice something we haven't noticed before and wrongly assume the frequency has increased (when it hasn't). Let's say I bought cannabis stocks as a way to play (what I perceive to be) the legalization of marijuana. All of a sudden, everywhere I look, there are more and more signs that support my thesis; the topic is featured on 60 Minutes, it's a hot-button issue during the election, it gains momentum in the mainstream media. While some of that may prove true, I'm on the lookout for news, whether it's conscious or not.

    7. Status-Quo Bias

    Most of us are creatures of habit in our own way. We use the same toothpaste or align with a particular smartphone device. That routine often extends to our investments in the marketplace: We're comfortable with the stocks (or indices) we often trade and often miss opportunities outside of that comfort zone for fear of the unknown. Change isn't only positive -- it's inevitable.

    8. Negativity Bias

    Let's face it: We live in a sensationalist society where scare tactics and negative headlines garner the most attention. If you doubt this for a minute, turn on your local news tonight. Scientists theorize that we perceive negative news to be more important than positive news. The risk -- for the bears and for humans as a whole -- is the tendency to dwell on bad news rather than embrace good news, and there's the added twist that the stock market is widely considered to be a leading indicator.

    9. Bandwagon Effect

    How prevalent is this when it comes to the financial markets? They teach it in college as a stylistic approach (momentum investing)! Nobody in our business, or in the media, wants to miss a move in the stock market, and history is littered with bubbles and busts that demonstrate this bias in kind. In life, this is driven by our innate desire to "fit in and conform"; in the markets, it's driven by two factors: fear and greed.

    10. Projection Bias

    This is predicated on projecting our thoughts and beliefs onto others and assuming that others are wired the same way (they're not). This can lead to "false consensus bias," which not only assumes that other people think like we do, but that they reach the same conclusions. In short, this creates a false consensus, or sense of confidence, when in fact one doesn't, or shouldn't, exist.

    11. The Current-Moment Bias

    This is a direct descendant of the immediate gratification mindset that dominated society for many years -- and some will argue that the government is currently operating in this mode, mortgaging our children's standard of living to achieve short-term fixes. In short, we want to live as well as possible and pay for it at a later date (as evidenced by the level of debt and our growing deficit). The housing crisis was rooted in this bias, as is the basic concept of leverage.

    12. Anchoring Effect

    This tendency, also known as the relativity trap, compares a situation to a limited subset of information; it's when we focus on a number or value and extrapolate it to a current situation. This often manifests in the marketplace through the fundamental metric, when we observe that a stock is "cheap" relative to its peers or a historical precedent (also known as a "value trap").
R.P.

Twitter: @todd_harrison

Follow Todd and over 30 professional traders as they share their ideas in real time with a FREE 14 day trial to Buzz & Banter.
< Previous
  • 1
Next >
No positions in stocks mentioned.

Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at todd@minyanville.com.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

More From Todd Harrison
Daily Recap
Todd Harrison: Janet Yellen, Bank Stocks, Smart Money, and Cognitive Biases
Digesting another round of information overload.
Todd Harrison    

Editor's Note: Todd posts his vibes in real time each day on our Buzz & Banter where subscribers can follow over 30 professional traders as they share their ideas in real time. Want access to the Buzz plus unlimited market commentary? Click here to learn more about MVPRO.

The Hump Day cometh and with it, a new round of news, information, catalysts, and communication has arrived. In the interest of respecting your time, I'm gonna dive right into some Random Thoughts, in no particular order:

  • Janet Yellen was on the tape earlier saying that a "high degree of accommodation remains warranted" with respect to quantitative easing. The reaction to news is always more important than the news itself, and it's worth noting that the tape didn't knee-jerk higher on the headline.
     
  • The Russell 2000 (INDEXRUSSELL:RUT) closed below the 200-day yesterday (RUT 1114), which is the first time that happened since December 2012. The all-important banks, for their part, are attempting to hold BKX (INDEXSP:BKX) 67, the 200-day, and a triple-bottom.
     
  • Note the potential head-and-shoulders formation on the BKX below, as well; IF (big if) it breaches BKX 67, a measured move "works" to BKX 60, or 10% lower, through a pure technical lens.

  • It's amazing to me that Twitter (NYSE:TWTR) now has the same market cap as what Facebook (NASDAQ:FB) paid for WhatsApp.
     
  • Market breadth on the NASDAQ Composite (INDEXNASDAQ:.IXIC) is 3:1 negative, but it only skewed negative on the Big Board (not yet a "tell").
     
  • I cleaned up (read: flattened) my remaining GW Pharma (NASDAQ:GWPH) yesterday, which was more housekeeping than trading (I sold the bulk last week). I'll look to buy it back lower if and when I'm given the opportunity.
     
  • SSE Composite Index (SHA:000001) 1985, Nikkei 225 (INDEXNIKKEI:NI225) 14K, and DAX (INDEXDB:DAX) 9K are still levels to watch, if and when.
     
  • I believe volatility will expand, and the proactive measure to address that is to trade smaller size.
     
  • I recently came across a terrific article that addressed 12 cognitive biases that prevent human beings from behaving rationally. As perception is reality in the financial markets, I thought it might be useful to address those issues through the lens of a trader.

    1. Confirmation Bias

    This is a fatal flaw of trading. We tend to surround ourselves with information that validates our own point of view and dismiss input that conflicts with our reasoning (also known as cognitive dissonance). This is the primary reason why we always strive to see "both sides of every trade," as the residual grist between variant views is where education -- and profitability -- resides. 

    2. In-Group Bias

    This is a manifestation of confirmation bias, or the tendency to surround ourselves with those who share similar takes on the tape. This could pertain to our physical environment or a virtual experience, such as Twitter. Not only does this provide a false sense of security in our individual viewpoints, it makes us suspicious -- or angry -- with outsiders who dare to question how we feel. (See also: The Gold Scold.)

    3. Gambler's Fallacy

    One of the most famous disclaimers in finance is that past performance is no guarantee of future results. This bias is often referred to as a "glitch" in our thinking in that it extrapolates what happened in the past to construct an idea of what will happen in the future. How many of you have played roulette at a casino under the premise that a string of red increases the likelihood of a black outcome? That's flawed thinking; the odds of red (or black, for that matter) are 48% on each independent spin.

    4. Post-Purchase Rationalization

    One of our Ten Trading Commandments is that the definition of an investment should never be a trade gone awry. Nobody initiates market exposure expecting to lose money, but we should never post-rationalize our risk (such as ignoring stop-losses or throwing good money after bad). We would be wise to remember that good traders know how to make money, but great traders know how to take a loss.

    5. Neglecting Probability

    History is littered with stretches where in hindsight we're reminded not to confuse brains with a bull market. This bias limits our ability to properly assess risk, whether it's overstating an unlikely event (such as buying a stock for a takeover) or understating an unlikely event (such as Y2K, the fiscal cliff, or a terrorist attack). Tail events do happen, of course, but betting on an outlier is a long shot by its very definition.

    6. Observational Selection Bias

    This is when we suddenly notice something we haven't noticed before and wrongly assume the frequency has increased (when it hasn't). Let's say I bought cannabis stocks as a way to play (what I perceive to be) the legalization of marijuana. All of a sudden, everywhere I look, there are more and more signs that support my thesis; the topic is featured on 60 Minutes, it's a hot-button issue during the election, it gains momentum in the mainstream media. While some of that may prove true, I'm on the lookout for news, whether it's conscious or not.

    7. Status-Quo Bias

    Most of us are creatures of habit in our own way. We use the same toothpaste or align with a particular smartphone device. That routine often extends to our investments in the marketplace: We're comfortable with the stocks (or indices) we often trade and often miss opportunities outside of that comfort zone for fear of the unknown. Change isn't only positive -- it's inevitable.

    8. Negativity Bias

    Let's face it: We live in a sensationalist society where scare tactics and negative headlines garner the most attention. If you doubt this for a minute, turn on your local news tonight. Scientists theorize that we perceive negative news to be more important than positive news. The risk -- for the bears and for humans as a whole -- is the tendency to dwell on bad news rather than embrace good news, and there's the added twist that the stock market is widely considered to be a leading indicator.

    9. Bandwagon Effect

    How prevalent is this when it comes to the financial markets? They teach it in college as a stylistic approach (momentum investing)! Nobody in our business, or in the media, wants to miss a move in the stock market, and history is littered with bubbles and busts that demonstrate this bias in kind. In life, this is driven by our innate desire to "fit in and conform"; in the markets, it's driven by two factors: fear and greed.

    10. Projection Bias

    This is predicated on projecting our thoughts and beliefs onto others and assuming that others are wired the same way (they're not). This can lead to "false consensus bias," which not only assumes that other people think like we do, but that they reach the same conclusions. In short, this creates a false consensus, or sense of confidence, when in fact one doesn't, or shouldn't, exist.

    11. The Current-Moment Bias

    This is a direct descendant of the immediate gratification mindset that dominated society for many years -- and some will argue that the government is currently operating in this mode, mortgaging our children's standard of living to achieve short-term fixes. In short, we want to live as well as possible and pay for it at a later date (as evidenced by the level of debt and our growing deficit). The housing crisis was rooted in this bias, as is the basic concept of leverage.

    12. Anchoring Effect

    This tendency, also known as the relativity trap, compares a situation to a limited subset of information; it's when we focus on a number or value and extrapolate it to a current situation. This often manifests in the marketplace through the fundamental metric, when we observe that a stock is "cheap" relative to its peers or a historical precedent (also known as a "value trap").
R.P.

Twitter: @todd_harrison

Follow Todd and over 30 professional traders as they share their ideas in real time with a FREE 14 day trial to Buzz & Banter.
< Previous
  • 1
Next >
No positions in stocks mentioned.

Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at todd@minyanville.com.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

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