If you have been wasting your hours reading the garbage on this Website, then you may well know that I have a bit of a taste for Psychology and the mind-bending games the Markets play on our emotions and how this affects our ability to eke out decent profits over time. Despite my interest I find it quite a difficult subject to write about and I suspect this is partly because when you distil everything down, there are not really all that many Psychological Concepts that we need to burden ourselves with and much of it is really about appreciating the ways our Brains can mislead us and trying to find ways to combat these negative influences.
I remember that I recently wrote a Series of Blogs about Topslicing and managed to make it into a wider discussion of Psychology at the same time and I find this is the most interesting way for me to write about the subject and hopefully such an approach has more relevance for Readers (this is probably because the subject matter can often be quite abstract and having Real World examples hopefully will assist understanding). However, I rarely find that such opportunities to write in this way come along, but for a change I have tripped over a way I can delve into this murky world yet again.
The other night (Thursday 12th January 2017) I had about an hour to kill and I was flicking through the Channels on the ‘Documentaries’ bit of my Sky TV and hoping to find ‘Wheeler Dealers’ or ‘Gold Rush’ or something like that, but it really was pretty bleak (how can this be when I have about 7,468 Channels?) but then I saw this thing on the ‘Eden Channel’ called ‘The Brain with David Eagleman’ - anyway, I think that was the title but I might be wrong. There was most definitely a bloke and a bird of prey in the name I remember.
Since writing the first Draft of this Blog Series I was given a copy of David Eagleman’s book on the TV Series called ‘The Brain - the story of you’ by some fortuitous coincidence - my mate was at an Airport and just so happened to see it and thought I would like it - she had no idea I had seen EagleBloke’s programme or anything. No doubt there is probably some sort of Social Psychology explanation for how she managed to read my mind from so far away !! (If and when I get a moment, I will shove the Book into ‘Wheelie’s Bookshop’ - it’s a nice little paperback but of course I haven’t managed to read it yet).
So, I started watching this programme with a pretty low expectation but it actually turned out rather good and explored several Psychological Phenomena which I had already got a feel for mainly through reading Daniel Kahneman’s outstanding book ’Thinking, Fast and Slow’ which I can say without doubt has had a bigger impact on me than any book I have read for years and years (ok, maybe ’Noddy goes to Toytown’ still has the edge). Of course you can get a copy of Kahneman’s epic in Wheelie’s Bookshop (sadly Noddy is out of print…..).
While it is sort of fresh in my memory, I will try to go through each of the concepts covered in the Programme and hopefully make them as easy to understand as I can. At the end of each bit I will try to draw some conclusions with regard to how these things can influence our Investing and what we can do to try to stay in control and not let our Brains trick us (sorry to say, this is probably almost impossible to do in practice but at least by recognising some of the problems we have a chance of fighting back).
The Psychology of Detachment
This is perhaps the least relevant to us as Investors, but I will include it because it is interesting and perhaps Readers will find it relates to their own Lives and Investing behaviour in ways that I have not figured out for myself.
The Programme started off with a Logic Experiment where the Subjects were told that they were at a Railway Track and there was a Runaway Wagon hurtling down the Track towards a group of 4 Workmen further down the Line. Right next to where the Subject is standing, there is a Lever and if they pull the Lever then a set of Points will move and the Runaway Train will be diverted and go down a separate Line and the 4 Workmen will live to muck about on Train Lines another day. However, there is a slight catch to this - if you pull the Lever, you are condemning to Death a single Worker who is doing stuff on the alternative Line.
What would you do? Would you pull the Lever? Assuming you don’t know any of the People and to you their Lives are of equal value (it might be you went to school with one of them and he was a t*sser), most People would decide to pull the Lever and the trade off is that you Kill 1 poor Unfortunate but you save the Lives of the other four.
Right, now a twist. Let’s say we have the same Scenario with the Runaway Train and 4 Workers further down the Line who will all end up in wooden boxes if the Train is not stopped or diverted. This time you are stood on the Platform with a huge Fat Bloke and if you push him off the Platform then he will flop in front of the Train and be killed stone dead but he will stop the Train and save the 4 Workers down the Line. What would you do in this case? Would you push the Fat Bloke off the Platform to save the other 4? Most people will not push him off and the 4 Workers down the Line get squished.
This is a great Logic Puzzle - it essentially shows that when we are detached from the consequences of our Decisions/Actions our Brains have no trouble dealing with this and we stay pretty happy and pat ourselves on the back for doing the ‘Right Thing’. However, when we are directly forced to kill the 1 Person to save the other 4, we are much more reluctant to do it because the Consequences are clear and much closer to us. In Logical Terms both Scenarios are the same - we are in effect killing 1 Person to save 4 People - but the closeness of the Action is the difference.
As I mentioned, it is a great Psychological Experiment but I am not sure how this really relates to my Investing. OK, at a stretch I guess I could say that this detachment from Consequences enables me to invest in Defence Stocks like BAE Systems (BA.) - I know their Products are killing people as we speak but because I don’t see the Consequences and they are millions of miles away from me, I don’t have to think too hard about it. The War example is a great one of how this detachment can mean Politicians in London have no problem condemning to death thousands of people in far away lands……
I really loved this bit of the Programme - it was really eye-opening although it is something I am very aware of. Mr Eagleman (BirdBloke) made some totally huge Signs a bit like what Bob Dylan used on the ‘Subterranean Homesick Blues’ video (if you are under 40 then look it up on YouTube). On the Signs he sprayed the words for a colour (EagleBirdChap not Dylan) - such as ‘Green’, ‘Blue’, ‘Pink’, ‘Orange’ etc. and I think he did these in Black Paint (they were all the same font using a Stencil and the Cards were all the same size and white and big).
He then went up to random People in the Street and as he showed them a Card they had to say what the word said - so obviously they just read out the Colour that the words spelled.
Then he did a sneaky twist. He had a new set of Cards which had the same words sprayed with the same Stencil but this time they were in Colour - but the Colours were wrong - for example, the word ‘Green’ was painted in Blue or the word ‘Yellow’ was painted in Red. Again the People had to say what the words spelt but you wouldn’t believe the trouble they had - many actually got them completely wrong and it was quite shocking. It is pretty clear that only when they took their time and thought about it and concentrated they got them right.
This is a cracking experiment to show ‘Cognitive Dissonance’ - in effect our Brains are being tasked with making a ‘Decision’ about what the word reads but the way it works is that one part of our Brain is competing with another part to be the dominant factor which makes our Decision. I can’t remember what the correct terminology is but it is something like Synapses or Neurons or whatever where our Brain triggers off lots of activity which is saying “This word spells Green” and at the same time another part of our Brain has a rush of activity where it is saying “This is Orange so the word spells Orange” or something like that.
In terms of Daniel Kahneman, the process here is that our ‘Fast Thinking’ reflexive and instantaneous Brain is coming up with these snap judgements and we then need to deploy our ‘Slow Thinking’ rational and controlling Brain to look at the 2 competing suggestions for the Answer from our Fast Brain and decide which of the 2 is correct. If we do not use our Slow Brain, then our Fast Brain will just go with whichever set of Synapses has the most ‘Energy’ and our mouth will chuck out that Answer whether it is correct or not.
Part of the challenge in this Experiment is that our Brains are trying to unlearn something that we have known for most of our lives - it is very difficult to do and takes effort. It is worth stressing the ‘Controlling’ (Regulating) function of our Slow Brains - often it is simply the job of this part of our Brains to monitor what the Fast Brain is up to and to direct it the right way or to stop it dead when it is wrong (or to stop us blurting out something outrageous like a Tourettes Sufferer - useful tip for Twitter users !!).
This Experiment is extremely relevant to our Investing activities - we are constantly faced with these kinds of competing factors in Decisions we make and it is important to recognise what is going on and to make sure we engage our thoughtful Slow Brains to avoid making dangerous snap-judgements and jumping to conclusions. A particular example that springs to mind for me is where many months ago I looked at Revolution Bars Group (RBG) and I very quickly ruled it out as an Investment because I was under the utterly false impression that it had Nightclubs and stuff - I have a nasty bias against Nightclubs because I remember Stocks like Luminar doing very badly in the past and I see Nightclubs as very low quality cyclical and fashionable businesses. However, this quick discarding of RBG was a costly error because in reality they do not do pure Nightclubs but more a sort of Food/Trendy Bar kind of thing with a Cuban theme and all that - in fact they are more like Restaurants really. Needless to say RBG Shares have shot up and I have missed out bigly (as The Tango Donald would put it).
I totally love this because so often we humans talk about our ‘Gut Feel’ and our ‘Instincts’ and suchlike for when it comes to making Decisions. For instance, just tonight on Eastenders (if you have not seen it, it is a real-life Documentary about the lives of normal everyday folk living in the Eastern part of London, the Capital of Scotland), Sonia’s daughter was suffering huge angst from a decision about whether to go to College to study Music or to stay on at 6th Form for A Levels - of course in the end she used her “Gut Feel” to make a very thoughtful and deliberate Decision (the truth is she is still not over her Ex who is staying on in the 6th Form).
Note: In this Sonia example there is another Psychological thing going on about ‘Question Substitution’ - this is where our Brains have to come up with an ‘answer’ for a particular Decision (in this case, “Should I go to College or 6th Form?”) but we substitute the ‘Question’ for such a Decision (in this case Sonia was really asking “Do you love shaki?”) and we answer that Question not the one we should be answering (yet more Cognitive Dissonance).
The scary bit is that there is actually a lot more to ‘Gut Feel’ than you might expect. Like it or not a huge part of any Decision we make is massively influenced (if not actually driven by in all cases) our Physical make-up or Physiological Factors - even simple things like “which Cheese shall I buy today” are influenced by our Bodily Functions.
Whenever we make any Decision there are tiny changes in our Physiology like our Heart Rate might quicken slightly, or we might start to sweat a little more or perhaps we get a small change in our hunger feelings, or perhaps a twinge in our urinary tract (sorry, couldn’t resist that one) etc. Believe it or not this applies to every Decision we make and even is thought by many Psychologists to be possibly the major part of most Decisions - I find this really quite scary because it implies that so much of our Thought Processes are totally out of our control and as much as I try to put effort into understanding such topics so I can be the Master of my Decisions, it might just be that I am entirely wasting my time.
In the Programme there was a fascinating Experiment around this. It consisted of a Computer Game where there were 4 Decks of Cards and the Subject had to click the Mouse on 1 of the 4 Decks and on each Deck they won a Monetary Prize - e.g. if they clicked on Deck 1 they might get “You won £20” and then they would click on Deck 4 and get “You won £75” and so on for lots and lots of goes (note the Value you win is totally random as far as the Subject knows and changes every time you click a pack). The object of the task as told to the Subject was to gain the most Money they could.
The twist to this was that the Decks were not actually giving Random rewards. It was fixed so that Decks 1 and 3 gave the highest Rewards. What happened in the Experiments was that the Subject would click away like crazy and after a long time they would start to realise that Decks 1 and 3 were superior and they would then focus on these and get higher Rewards.
There is a nuance here though. At a certain point in each Experiment, the Subject would be asked “If you could choose only 1 Deck to keep, which one would it be?” and in nearly every Experiment with different Subjects they would all choose Deck 3 which happened to be the most generous Deck. However, the sneaky bit is that at this point in time the way the Subject was playing the Game showed no bias towards Deck 3 - in fact it often showed a bias for a different Deck. The point here is that the Subject’s Gut Feel (in other words their Physiological responses) had already spotted that Deck 3 was the best Deck but their Brains had not yet picked up that this was the case. The Physical was leading the Psychological to get to the correct Decision. Amazing.
It is like our Bodies have the ability to ‘think’ and our Brains often follow this lead after a small time delay.
In the Cheese example, the factors that influence our Decision could be both obvious and bizarre things such as the weight of the packet in our hand, the colour of the packaging, the picture of a cow on the front, the smell of the packet, the texture of the cheese as we hold it, a small cut on the back of our hand that we had not noticed before, the music being played in the background at the local Lidl, the Yoghurt on the shelf that we really crave, etc. etc…..
In terms of our Investing this throws up some conflicts I feel. My instant response would be to say that ‘Gut Feel’ is a dangerous thing but maybe I am mixing it up with my ‘Fast Brain’ not more of a physiological thing. However on the other hand, I often have a ‘Gut Feel’ that a certain Stock is cr*ppy and over the years I suspect that repeated experience (we will come onto this later in the Blog Series) is reinforcing that perception. I guess I am saying that I am unsure how much of a help or hindrance Gut Feel is - at this point in time I would probably have to say that I have not thought about this much and perhaps I need to ‘study’ it in myself now that I am much more aware of it as a possible factor to influence my Stock Choices and Investing Decisions such as when to Sell?, how much Money to put into 1 Stock?, whether or not to use a Stoploss? etc. etc.
Doing a parallel with the Cheese example, it could be that my view of how good a Stock is could be affected by daft things like how my Coffee tastes or whether or not I feel warm and cozy………
That’s it for Part 1 - I hope your brain isn’t hurting too much now. Go and have a lie down and take some paracetamol.
See ya, WD.
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