The Psychology of Successful Trading: Behavioural Strategies for Profitability \( PDFDrive.com \).epub by Tim Short

Author:Tim Short
Language: eng
Format: epub
Published: 2017-10-26T08:17:03+00:00

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The strength of this conclusion is reinforced by the conclusion of Biais and

Weber (2009) that higher paid bankers of all types exhibited less Hindsight Bias irrespective of what department they were in, their age and experience, their seniority or any other factor. Notably, having a high Hindsight Bias score was a guarantee of not being highly paid in the research department. These results were obtained from professionals being asked questions about their specific areas of expertise and on which they were highly motivated, so one suspects that the

market does not teach one to avoid the bias. My suggestion, then, as a rather glib rule of thumb, is that whenever one is asked to make a judgment relying on a volatility estimate, to consider the volatility estimate and then double the number you first thought of. It would at least be an interesting thought experiment to ask the question: what would happen to my proposed course of action if everything is at least twice as volatile as I think?

There are two candidate explanations for how Hindsight Bias can arise (Bernstein et al. 2007, p. 1375). On one view, memories are overwritten with new information.

On the second view, the memories are retained but they are accessed in a biased

way. My view, which is probably consistent with either of these two approaches is one of cross-talk between memories of data and memories of what one thought about that data. Bernstein et al. (2007, p. 1374) describe a situation where S has to estimate what O will say as the height of the Statue of Liberty. If S has the correct answer, 151ft, S will make a number of Theory of Mind errors about O’s estimate of the height, even when O is S at a previous time. So, S’s view of O’s view of the height moves towards the correct answer when S has that correct answer. Before S is told the answer, there is much more variance predicted in O’s answer. Since this applies also to O when O was S at a previous point, we can ask the critical question of S: What did you think the height was before? Now S will claim that S’s previous estimate was much better than it was.

This does not happen immediately. Adults who said a second ago that the

height of the Statue of Liberty was 200ft do not commonly claim now that they

said 175ft. However, they will move towards claiming that they thought that

once sufficient time has elapsed; Hindsight Bias is robust “from minutes to years”

(Bernstein et al. 2007, p. 1375). In parallel, we can see this effect in a much

stronger form in developing children. Those who are too young to pass the False

Belief Task will be quite brazen in their assertions of what they thought and said a few seconds ago. If they now know that there are Smarties in the pencil case, they will claim that they knew that all along and that is what they said, even if they actually said ‘pencils’ not a minute before.

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