Janice Dorn, MD, PhD
Neuropsychological Trading Coach
Janice Dorn, M.D., Ph.D., has been a full-time futures trader since 1994. Doctor Janice holds an M.D. in psychiatry and is board-certified by the American Board of Psychiatry and Neurology in general psychiatry and addiction psychiatry. She holds a Ph.D. in brain anatomy. A graduate of Coach University, she is a pioneer market psychiatrist and financial neurobehaviorist. Doctor Janice has written over 500 articles on the financial markets and coached over 600 traders worldwide. She is the Global Risk Strategist for Ingenieux Wealth Management Group, Sydney, Australia.
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Those who have knowledge don't predict. Those who predict don't have knowledge...Lao Tzu (Poet, 6th Century B.C.)
If there is one thing that gurus and want-to-be gurus take delight in, it is predictions. Day in and day out, there is always someone, somewhere who has it all together and has no end of words, charts, indicators, seasonals, almanacs and every other conceivable scenario to tell you: where the market is going, why it is going there, when it is going to get there, and what specifically to do about it. I have one word for you about this: Ignore. And, another few words: Strap the so called analyst guru to the dart board, and start throwing darts in an attempt to pin him down. If you can't find the analysts and are not into rather cruel and unusual games, then just take all the predictions, put the predictions on the dart board and start throwing darts. One of these times, you might get a bulls-eye.
There is an endless stream of pundits who will announce the end of the world in extreme market downage, and the end of the world at market tops. At some point, they will be correct, even if it takes years and years. They will stay with their predictions and prognostications until they truly believe they are Nostradamus. Self delusion, stubbornness, call it what you will. In the final analysis, the analysis means nothing. It is, in many respects, the ranting of an individual who does what he or she can to justify the prediction because...well, because it's his or her prediction.
Think about the capital of Kentucky in the last Trading Wisdom. How many of you got that answer right? How sure were you that you knew the pronunciation of the capital of Kentucky that you would wager $2000?
The two most common of the cognitive biases with which we deal in Behavioral Neurofinance are over-optimism and over-confidence. What does this mean?
Overconfidence refers to a situation where someone is surprised more than they expect to be. Put into statistical terms, this is called "miscalibration" or out of "kilter." This means that if we ask someone for a forecast and then ask them for 98% confidence intervals so that the true answers should lie outside of the bounds by 2%, the forecast actually tends to be outside of bounds over 30% of the time! Those who predict are way too certain about their ability to predict.
A repeated finding in the literature is that so-called experts are even more overconfident than those who do not consider themselves experts. Sadly, this feeds upon itself, since extra knowledge feeds into the brains of these so-called experts in such a way as to elicit even higher levels of overconfidence. There is a myriad of evidence from the literature of Behavioral Neurofinance suggesting that professionals of all types (doctors, lawyers, weathermen, market analysts) continue to forecast even when statistical evidence is clear that they cannot do it with any reasonable consistency or accuracy.
The two fundamental behavioral reasons for this are ignorance and arrogance. What do I mean by this?
Ignorance is basically not knowing that one is overconfident. The person thinks he or she knows a lot more than he or she actually knows. They do not know that they are overconfident, or- if they do know-they will not accept or admit overconfidence. In a way, it is a kind of self-delusion, without the psychotic elements (although presence of psychosis cannot be ruled out).
Arrogance is much deeper than ignorance. Arrogance is a psychological defense mechanism to protect again what is sometimes called low self-esteem, but actually is just an attempt to defend against others finding out the "truth" about the person making the prediction The truth is that this person has little or no confidence, yet hides behind overconfidence. This is one of the primary ways that the brain tricks us into believing things about ourselves which are simply not true. Many people, deep down inside feel like true imposters, yet it is too painful for them to deal with this. So- they put on masks of confidence which allow them to live their charade.
When we played our charade
We were like children posing
Playing at games, acting out names
Guessing the parts we played .
Sad little serenade
Song of my heart's composing
I hear it still, I always will
Best on the bill
Charade ...Henry Mancini
I will write more about overconfidence in the days ahead. For now, please try to get your head around this. As ego-deflating as it may seem, you likely think you know more than you actually do. Sorry, people, but it is the way of the world. The majority of literature from Behavioral Finance indicates that most people assess their skill level at a level which is considerably higher than their actual performance. If you take a hard look at yourself, you will see that this applies just as easily to you as it does to any one those analysts you may or may not have strapped to your dart board.
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