7 Stupid Thinking Errors You Probably Make - Aussie Stock Forums

# Thread: 7 Stupid Thinking Errors You Probably Make

1. ## 7 Stupid Thinking Errors You Probably Make

Very interesting article to be found at:

http://www.lifehack.org/articles/lif...ably-make.html

This stuff could be relevant to my trading...

1) Confirmation Bias

The confirmation bias is a tendency to seek information to prove, rather than disprove our theories. The problem arises because often, one piece of false evidence can completely invalidate the otherwise supporting factors.

Consider a study conducted by Peter Cathcart Wason. In the study, Wason showed participants a triplet of numbers (2, 4, 6) and asked them to guess the rule for which the pattern followed. From that, participants could offer test triplets to see if their rule held.

From this starting point, most participants picked specific rules such as “goes up by 2“ or “1x, 2x, 3x.” By only guessing triplets that fit their rule, they didn’t realize the actual rule was “any three ascending numbers.” A simple test triplet of “3, 15, 317“ would have invalidated their theories.

2) Hindsight Bias

Known more commonly under “hindsight is 20/20“ this bias causes people to see past results as appearing more probable than they did initially. This was demonstrated in a study by Paul Lazarsfeld in which he gave participants statements that seemed like common sense. In reality, the opposite of the statements was true.

3) Clustering Illusion

This is the tendency to see patterns where none actually exist. A study conducted by Thomas Gilovich, showed people were easily misled to think patterns existed in random sequences. Although this may be a necessary by product of our ability to detect patterns, it can create problems.

The clustering illusion can result in superstitions and falling for pseudoscience when patterns seem to emerge from entirely random events.

4) Recency Effect

The recency effect is the tendency to give more weight to recent data. Studies have shown participants can more easily remember information at the end of a list than from the middle. The existence of this bias makes it important to gather enough long-term data, so daily up’s and down’s don’t lead to bad decisions.

5) Anchoring Bias

Anchoring is a well-known problem with negotiations. The first person to state a number will usually force the other person to give a new number based on the first. Anchoring happens even when the number is completely random. In one study, participants spun a wheel that either pointed to 15 or 65. They were then asked the number of countries in Africa that belonged to the UN. Even though the number was arbitrary, answers tended to cluster around either 15 or 65.

6) Overconfidence Effect

And you were worried about having too little confidence? Studies have shown that people tend to grossly overestimate their abilities and characteristics from where they should. More than 80% of drivers place themselves in the top 30%.

One study asked participants to answer a difficult question with a range of values to which they were 95% certain the actual answer lay. Despite the fact there was no penalty for extreme uncertainty, less than half of the answers lay within the original margin.

7) Fundamental Attribution Error

Mistaking personality and character traits for differences caused by situations. A classic study demonstrating this had participants rate speakers who were speaking for or against Fidel Castro. Even if the participants were told the position of the speaker was determined by a coin toss, they rated the attitudes of the speaker as being closer to the side they were forced to speak on.

Studies have shown that it is difficult to out-think these cognitive biases. Even when participants in different studies were warned about bias beforehand, this had little impact on their ability to see past them.

What an understanding of biases can do is allow you to design decision making methods and procedures so that biases can be circumvented. Researchers use double-blind studies to prevent bias from contaminating results. Making adjustments to your decision making, problem solving and learning patterns you can try to reduce their effects.

2. ## Re: 7 Stupid Thinking Errors You Probably Make

Ah, the old cognitive biases.

We all do this... and more ==>> http://en.wikipedia.org/wiki/List_of_cognitive_biases

3. ## Re: 7 Stupid Thinking Errors You Probably Make

That is why the following saying is so wise:-

A fool thinks himself to be wise, but a wise man knows himself to be a fool.

4. ## Re: 7 Stupid Thinking Errors You Probably Make

Originally Posted by Knobby22
That is why the following saying is so wise:-

A fool thinks himself to be wise, but a wise man knows himself to be a fool.
Knobby, From that I'm assuming it's ok to conclude that an average bloke can think of himself as .. average?

One thing I reckon is a stupid error and that is to doubt the evidence in front of your eyes (or ears etc). Never doubt yourself even if you only have a few sketchy facts to back it up IMO.

I was on a yacht once, took a few sun and star shots and did my first triangulation using spherical geometry - concluded we were way off course - like 8 or 10degrees windage (whatever) while beating into the wind - pretty inexperienced at the time lol. Concluded I must have screwed up and kept going - we were on our way from Fiji to Samoa at the time - that night Tonga came up dead ahead - thanks chrise it was a full moon

Ever since, if people tell me - eg (an easy example) - "the car's thermostat must be broke - it's off the scale" - I screech to a halt

PS It becomes a right nuisance of course when people fit alarms to their cars or houses which are triggered by doves or the like

5. ## Re: 7 Stupid Thinking Errors You Probably Make

Wayne - thanks for the longer list...as if I didn't have enough to worry about ........

What's the bias for thinking none of this applies to me? Probably this one encompasses it nicely.

6. ## Re: 7 Stupid Thinking Errors You Probably Make

20/20 - in a situation with only sketchy facts then I think you are right to back yourself and then to recognise what new facts, if and when they emerge, can support or dispute your judgement, and respond accordingly. This is particularly relevant in the markets where we are often/nearly always dealing with decision-making under circumstances of incomplete information. Maybe we can call it the Tonga-dead-ahead effect...

7. ## Re: 7 Stupid Thinking Errors You Probably Make

Originally Posted by Timmy
20/20 - in a situation with only sketchy facts then I think you are right to back yourself and then to recognise what new facts, if and when they emerge, can support or dispute your judgement, and respond accordingly. This is particularly relevant in the markets where we are often/nearly always dealing with decision-making under circumstances of incomplete information. Maybe we can call it the Tonga-dead-ahead effect...
timmy ahh - when it comes to the market lol... !
sometimes I think the biggest error (in my case anyway) is assuming one ( / I) can rationise the market at all - maybe some of you others have a better way - but sometimes I work it all carefully, then say - ok - I'll do the opposite! - and it works !! lol (well it works as often as not).

But I reckon the old story about 97% of traders go backwards is incorrect - certainly in recent years - even a mug could show a profit lately - the future? well maybe the bank will start to look more attractive - as interest rates go up - I'm thinking that they'll go up - assuming they do go up - maybe that's the 8th stupid thinking error. ? lol.

8. ## Re: 7 Stupid Thinking Errors You Probably Make

20, I wonder about this counter-trading oneself - is it possible to design a really terrible trading plan/system that shows no profits, only massive losses? Don't want it showing much in the way of open profit, just straight to loss thank-you. If 97% of traders lose money (or whatever the figure is) how hard can it be?

9. ## Re: 7 Stupid Thinking Errors You Probably Make

Originally Posted by Timmy
20, I wonder about this counter-trading oneself - is it possible to design a really terrible trading plan/system that shows no profits, only massive losses? Don't want it showing much in the way of open profit, just straight to loss thank-you. If 97% of traders lose money (or whatever the figure is) how hard can it be?
tim - BRILLIANT !!
lol
if only people bet short when all the rest are betting long -
then 97% will win !! lol

10. ## Re: 7 Stupid Thinking Errors You Probably Make

OK 20, I think I have got it.

I will PM you when I want to go long, you just get short immediately. T/P is my stop, stop is my T/P - that clear? I will also PM you when I want to go short, you go long etc.

Meanwhile, you PM me when you want to get long etc. etc.

This is going to be HUGE!

P.S. Please keep this between you and me - when we have a decent track record we can become one of those there Educators (actually, who needs a track record - let's start being educators now!).

11. ## Re: 7 Stupid Thinking Errors You Probably Make

Originally Posted by Timmy
OK 20, I think I have got it.

I will PM you when I want to go long, you just get short immediately. T/P is my stop, stop is my T/P - that clear? I will also PM you when I want to go short, you go long etc.

Meanwhile, you PM me when you want to get long etc. etc.

This is going to be HUGE!

P.S. Please keep this between you and me - when we have a decent track record we can become one of those there Educators (actually, who needs a track record - let's start being educators now!).
k m8 -
go you halves in the profits.

12. ## Re: 7 Stupid Thinking Errors You Probably Make

reminds me of the one about the tenders come in for the cross-channel tunnel.
Dragage Coignet \$16 billion
Kumagai Gumi \$ 18 billion
P Murphy and son \$ 975.60

So they do Paddy the coutesy of an interview - "now Paddy, how is it that you can be so much cheaper" ??
"well", sez Paddy , "it's just me and the boy - we don't have any of those fancy overheads"

"and how would you do it paddy?"
"well, he starts at one end with a pick and shovel, and I start at the other, and when we meet in the middle , then we go home, and you've got yourself your tunnel."

"and what happens if you don't meet Paddy?"

"well then - I guess you've got two tunnels fer the price of one"

(i.e. foolproof )

PS how do you confuse an irishman?
show him 3 shovels and tell him to take his ....yeah yeah, we all know that one

#### Posting Permissions

• You may not post new threads
• You may not post replies
• You may not post attachments
• You may not edit your posts
•
Aussie Stock Forums