Another aspect of trading that cropped up last week was the whole thing about trading psychologies.
This was kicked off by one of the speakers, a Psychology Professor, exploring the psychology of trading.
One of the best examples of such madness is described in the book and movie American Pyscho by Bret Easton Ellis, about a guy who is a Wall Street trader by day and a homicidal maniac by night:
“I have all the characteristics of a human being: blood, flesh, skin, hair; but not a single, clear, identifiable emotion, except for greed and disgust. Something horrible is happening inside of me and I don't know why. My nightly bloodlust has overflown into my days. I feel lethal, on the verge of frenzy. I think my mask of sanity is about to slip.”
A fine line between sanity and madness in the trading rooms of the world’s financial markets.
If you don’t think so, then checkout another fine book by David Charters, a former investment banker: “At Bonus Time, No-one Can Hear You Scream” (free eBook, courtesy of efinancial news):
“Last night I killed my boss. It was the second time this week, only this time it was much worse. He was sitting at his desk in his big, glass-sided, corner office, looking out at the trading floor with its hundreds of identical workstations, the computer screens, the phones, and us, the worker bees who feed the machine. Looking at us, as we stayed late in the run-up to the annual bonus round, putting in face time to look good, keeping busy, trying to persuade him how essential we all were. Well, I’d had enough.”
The truth is the markets are mad, and the people who work the markets are mad.
Want any more proof, then just check out the true story of the Wolf of Wall Street, Jordan Belfort:
As a 31-year-old multimillionaire stockbroker, Belfort once landed his helicopter on his back lawn, flying with just one eye open because he was so stoned he had double vision. He sank his 167ft motor yacht, complete with seaplane and helicopter, after overruling the captain and taking it into a Mediterranean storm. He organised a midget-throwing contest to entertain brokers on his trading floor. And when he wasn't completely out of his head on drugs, or getting executive relief from prostitutes in the presidential suites of luxury hotels, the man nicknamed the Wolf of Wall Street was presiding over a firm that swindled investors out of $200 million in a shares fraud that landed him and his chief confederates in prison.
I could name many more illustrations – both factual and fiction – of the madness of markets, but the core of how to work these markets is to detach the madness from the rational.
To be detached and remote from the action, and to watch it with a heart rate of 80bpm or less.
After all, going back to our psychology professor's presentation, he makes clear that it is emotions that ruin traders.
Citing experiments by various psychologists just shows that all sorts of factors from sunshine and clouds to wind and the cycles of the moon affects our trading strategies.
Take this one: “Affective Inﬂuence on Judgments and Decisions: Moving Towards Core Mechanisms”, by Piotr Winkielman, Martin Paulus and Jennifer L. Trujillo of the University of California, with Brian Knutson of Stanford University.
In this 2007 experiment, people were shown angry and happy faces and tested to see how it affected their decision making. Interestingly, those who had seen the angry and frightened faces were far more risk-averse than those who saw the happy ones.
This explains the madness of crowds.
If everyone’s happy, you follow the crowd; if everyone’s sad, you are too.
It’s all about the pre-frontal cortex and what makes us man, and is the reason why Warren Buffett says: “Be fearful when others are greedy, and be greedy when others are fearful”.