An alternative view

To analyze market behavior, you should take into account aspects of people's irrational perception of many concepts, situations, and actions. If these phenomena are evaluated, they can be used in trading processes.

An alternative view of familiar concepts and phenomena

Specialists who deal with behavioral trading methodologies focus on the irrationality of perception of many situations and concepts. They suggest considering the usual phenomena from a different angle and taking into account aspects of irrational behavior of market participants in forecasting and forming trading operations.
Excessive confidence

 

A phenomenon in the trader's behavior

 

Economic theory says that people are too sure that they are right. Research shows that of those people who determine their rightness in the ratio of 1 to 100, they are wrong in 20% of cases, those who equate the level of rightness in the ratio of one million are wrong in 4% of cases. That is, if you reformulate it, it means that people are forty thousand times more confident in their rightness than they actually are. Such self-assessments are called self-attribution bias. This is why traders who have taken advantage of the market opportunities and made money on certain trades consider themselves really smart. People tend to attribute success to themselves, but in the market it is based on the mistakes of others. The trader may not know how true his knowledge is, but he may think that he knows exactly what to do. Such phenomena are not uncommon in the market.


Dependency on wording

 

In the promotion of goods, services, innovations, and technologies, special formulations are often used that cause addiction in a person. It is interesting that such phenomena were characterized by a concept called "cooking". This definition arose due to the fact that most people, falling for the tricks of promotion technologies, exclaim: "Wow, how everything was cooked up!". In fact, the person is to blame himself, he did not understand the structure of something and did not foresee the consequences of his choice. Also, to direct a person's thoughts in the right direction, questions can be formulated in different ways. They may look similar, but the answers to them will be different. For example, you can ask a trader: "did you Like the new promotion held by the broker?" or "are the terms of the promotion Good?". Many conclusions depend on the question posed. This is the fiefdom of propaganda, which in the modern version is called promotion. The person is not aware of how his thoughts are directed in the right direction.
Biased reasoning over time

 

A phenomenon of trader behavior in the market

 

People tend to overestimate their knowledge in the past. Events that occurred in the past seem more predictable than it was in reality. You can often hear exclamations from traders: "I knew that the price would rise." But this is not so: if the trader was sure that the price would really go up, then he would take appropriate measures. In fact, if you add up all the statements of this kind uttered by a trader, it may seem that he has no equal as an analyst who makes high-precision forecasts. This is a kind of human illusion, which is based on excessive self-confidence. A person likes to rewrite history in a new way, in it he appears as a participant who knew everything and foresaw everything.


Information cascades

 

R. Schiller called the process of spreading rumors an "information cascade". A person who receives information in the form of hearing passes it on. The number of people who have taken note of this rumor increases, they start talking about it, there is "something" that is perceived as true. For example, somewhere there was an article that the price of gold will rise in a certain period based on certain reasons. After that, this article can be referred to by a number of other authors, subsequent ones will cite the second ones, and so on. As a result, almost everyone already knows that gold will rise. The fact described in the article may not be based on solid grounds, or it may be completely unverified. However, if the author's name is authoritative in the financial world, it will be enough to spread rumors. The interesting thing is that the market can react to them if they get a significant distribution. Information is always received, but it can be the size of a stream or look like a waterfall. Its effectiveness may depend not on the accuracy, but on the literacy of the submission.

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