Maybe We’re not in Control after all - Part 3 of 3

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If you have not already read Parts 1 and 2 of this Blog Series (or if your Goldfish Brain needs to swim around the Bowl again……) then you can read them at these links:

http://wheeliedealer.weebly.com/blog/maybe-were-not-in-control-after-all-part-1-of-3

http://wheeliedealer.weebly.com/blog/maybe-were-not-in-control-after-all-part-2-of-3

Dopamine hit
We often hear about ‘Dopamine’ but chances are we don’t really appreciate the mechanism around this inside our Brains. The TV Programme went into this and explained about how when we have an enjoyable experience and get excitement and pleasure, we get a hit of the chemical Dopamine as a natural response. I think the Dopamine gives the pleasure and makes us feel happy and it is the Brain’s way developed over eons by evolution to encourage Human’s to behave in certain ways and to follow certain pre-programmed behaviours. Obviously it is in the interest of the Human Species for individual Humans to want to have babies so the Dopamine is provided when we do activities which lead to this outcome !! (calm down you lot).

From how I understood it, Drug Addicts (and other Addictions like Booze, Gambling, Candy Crush, AIM Junk Stocks etc. are the same) like the Dopamine Release they get when taking Heroin or whatever and the problem arises because they get used to the Dopamine and want a bigger and bigger Dopamine Hit and take more and more of the Drug or move to stronger Drugs to get this pleasure chemical - and of course this leads to trouble.

Scarily I think there is a very clear Investing / Trading Risk here which we need to be conscious of. There is no doubt that we can get excited when Stocks are rising and we are making Money and this ‘addiction’ caused by a Dopamine Hit as we are increasingly happy can lead us to very dangerous behaviours - such as getting over leveraged, taking higher risks, snatching at profits, trading too much (over trading), glossing over risks as we feel we can do no wrong, just becoming very obnoxious individuals !! (this latter element definitely is shown to a full extent in the book ‘Cityboy’).

This is also the case when we Buy Stocks and Sell them; especially when we are new to Investing/Trading it is very ‘exciting’ to buy a Stock and our Heart starts beating faster and the Dopamine is in full flow cos we know that pushing that little button is going to make us fabulously rich. I have no doubt this kind of excitement is dangerous and very difficult to control - only with experience and years and years of Investing do we perhaps start to reduce this Excitement Emotion when buying - although even after all these years I am sure it is still a factor in my own emotional make-up.

I know I have mentioned this many times before but it is important to recognise these tendencies in ourselves and to try to lower the Emotional Highs and Lows of Investing and to move towards a more stable and balanced emotional mindset when we are doing any of our Investing Tasks. Be Robotic and Mr Spock like.

At the end of this Blog I have included a link to the YouTube Videos of David Eagleman’s TV Series - if you are interested in the Dopamine bit and the way Drug Addicts are sucked in (and new ways that Psychologists are devising to lower dependency) then the TV Programme on this is very good.

The Conjunction Fallacy
Here is a bit of Bonus Psychology for ya. I was reading Investors Chronicle and tripped over this bit - I will just type it in word for word and you can make your own deductions from it and I suggest you will need to think about the logic of how it comes to the result that such an outcome is impossible:

“Back in 1981, Amos Tversky and Daniel Kahneman told some experimental subjects about Linda. She was a bright 31 year old who had been politically active as a student. They then asked: what is the probability A, that Linda worked in a bank? Or B, that she worked in a bank and was active in the feminist movement? More subjects said B than A. But this is logically impossible: it cannot be more likely that Linda was a bank worker and active feminist than that she was just a bank worker. There’s a name for this: the conjunction fallacy.”

How we read other people’s emotions
This part of the David Eagleman TV Programme probably was the most unusual and completely unexpected. I guess it is very much to do with Empathy as you should see in a bit as I flesh out the details behind it. In principle, it turns out that we do not actually ‘read’ other peoples Emotions and Feelings - the actual process is that we mimic or mirror the other person and it is how our own Minds process our facial expressions and suchlike that actually determine the other person’s emotions.

As an example, let’s say you meet someone who has a huge smile on their face. The obvious interpretation of this is that you see their smile and you recognise that facial pattern and you know that means they are happy. However, it is not how it actually works. The reality is that you see them smiling and probably even before you register their smile in your conscious brain, your facial muscles (I assume driven by subconscious Brain functions - Kahneman’s ‘Fast Brain’) are copying or mimicking the expression on their face. What then happens is that your Brain interprets the Smile ON YOUR FACE (not theirs) and it is this that tells you they are in a good mood. How nuts is that?!!!

Now, this has been shown experimentally and by an amazing approach. The practice of ‘Ladies of a certain age’ (and some ‘Men’ no doubt !!) to use Botox to reduce signs of aging and wrinkles actually works by paralysing muscles in the face. In the experiment, they get a group of people who use Botox and a group who do not and then they show each of the Subjects pictures of people with different facial expressions and they ask the Subjects to say what mood they think the person in the picture is experiencing. The results are amazing - the group who use Botox (who are unable to move many of their facial muscles) were considerably worse at ‘reading’ the emotions of the people in the pictures. In other words, next time you meet someone with a blank expression and puffy eyebrows and lips, don’t be surprised if they seem poor at empathy !!

Learned Helplessness
Here is another Bonus for committed Readers who have got this far !! This is by far my favourite Psychology thing and it is because I see it in myself all the time and it never ceases to amaze me. I guess I first came across this at College and it involves an experiment with a Dog which is both cruel and yet at the same time sort of funny.

In the experiment, they shove a Dog into a box which has no roof but from which the Dog cannot escape, and the floor of the box is metal and is wired up to the Mains (ok, I am exaggerating but you get the idea - please don’t call the RSPCA and definitely don’t try this at home - well, not without your parents permission anyway !!). What happens then is that they flick the switch and give the poor hound a zap of current…..

“Zzzzzzzzz……..woof !!”

They do this quite a few times (hopefully the Dog still has some fur left….) over a period of weeks and then they remove one Side of the Box so that the Dog can escape if it wants to. This time they turn on the juice…..

“Zzzzzzzzz……..woof !!”

……but the stupid Mutt stays there and doesn’t escape - it just gets zapped. They then repeat the experiment over and over and gradually remove all of the Sides of the Box - and still the crazy Canine just stands there getting shocked…..

“Zzzzzzzzz……..woof !!”

I’m sure you can see why I love this one. The essence of it is that we Animals get used to feeling helpless and unable to change our circumstances - we get used to bad things happening and we just do nothing about it when in fact we could change things if we could put our minds to it.

Another reason why I love this one (apart from “Zzzzzzzzz……..woof !!”) is because I can think of so many of my own examples. One I remember from many many years back was that I used to drive to work from Cobham to Guildford every day and I would hit the A3 and go straight into a Traffic Jam and waste stacks of time. I must have done this for about 6 months or something and then one day I suddenly thought “why don’t I got the other way?” and lo and behold, I took a slightly different route and avoided the Traffic from then on.

I absolutely detest Shaving (I also hate Beards so you can see the dilemma I face on a far too regular basis) and when I used to work in an office and stuff I used to utterly hate having to Shave every day with a razor and all that Foam and stuff. It really bugged me but I did it for years and years. Then, one day, I suddenly thought “Why don’t I buy an electric razor and shave in the evening while watching telly?” and the problem was simply solved.

I haven’t applied the WheelieBrain to this too much yet, but I suspect there are various behaviours I do with regards to my Stocks that derive from this kind of ‘Learned Helplessness’ trait - with the way I keep screwing up Index Trades that might be a clear example that comes to mind immediately.

It’s quite scary how close we actually are to that unfortunate hound in how we behave.

Conclusion
As Investors / Traders we need to have humility and to realise that we are often wrong with our Judgements / Decisions and we need to think in a more probabilistic way. Dogmatic and certain thinking (this will 100% happen) is naïve and clearly will lead us to make mistakes - of course this applies to Political Arguments as well - and anyone who claims to know certainties out of the Brexit Decision are clearly wrong and lack the ability to think in a flexible manner which can see all sides of a possible outcome. Sitting safe and secure and comfortable in our own little Echo Chambers could have very detrimental impacts on how we think and the more we do this the more our Brains will be trained into such thought patterns.

The nub of it is as per this piece of text I wrote in Part 1 which covers it pretty well:

“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”.

If we can take that onboard and be fully aware of how our Brain’s can be leading us up the garden path that will empower us with a far better mindset than just blindly ignoring such influences. Once we can recognise these traits in ourselves (and others) we can work on how to limit the damage they can cause to our Portfolios by various methods such as reframing our thoughts, building in automatic mechanical safety devices like Stoplosses/Portfolio Weight Limits etc. (Eagleman refers to these as a ‘Ulysses Contract‘ based on how Ulysses told his crew to tie him to the mast so that he was unable to respond to the temptations of the Sirens), and making sure we are physically in good shape with plenty of Sleep and no booze or anything !!

Recognising how Psychology impacts others also enables us to see Trading Opportunities that come about through Emotional Behaviour such as the Fear and Greed we often see causing wild swings in Stock prices.

If you are like me intrigued by the whole subject of Psychology and how it can affect our Investing/Trading performance, skip over to Wheelie’s Bookshop where there are several Books on the theme and in particular I recommend Daniel Kahneman’s ‘Thinking, Fast and Slow’ and of course David Eagleman’s Book ‘The Brain’ which covers a lot more about how your Brain is actually constructed in a physical sense and how it develops over your lifetime - it really is fascinating and a very easy read. The bits at the end about how already technology is enhancing our Mental capabilities is rather Sci-fi and scary though….

You can find YouTube videos of David Eagleman’s ‘The Brain’ TV Series here and it is defo worth taking time to watch them because they are outstanding:

https://www.youtube.com/watch?v=3MSw2irv0-A

Regards, WD.


PS. No animals were harmed in the making of this Blog Series (well, not much anyway and the fur is already growing back…..). As an added Freebie from WD, if you find you are having discipline problems with your beloved mutt, then show him/her this Blog and I can guarantee you 100% he/she won’t take a blind bit of notice !!