Illusion of Control
Feb. 27, 2008
My new favorite fallacy is the <a href="http://en.wikipedia.org/wiki/Illusion_of_control">Illusion of control</a>. This is a psychological condition in which a person believes they have control over a situation in which they actually have little to no control. In fact, a person's rate of control has more to do with how often they "win" than how frequently they influence the outcome of a random event. So a person who wins a lot will be more likely to believe they are influencing the outcome of random events, like dice. This is one of the contributing factors in gambling addiction.
Most interesting to me is <a href="http://www.ingentaconnect.com/content/bpsoc/joop/2003/00000076/00000001/art00003;jsessionid=1xlzxu52r29va.alice">a study</a> done in 2003 of traders working in investment banks. The authors found that traders who were more susceptible to the illusion of control were more often the worst performers in their firms. Since I work for a trading firm, I wonder how much of what we do is based on this illusion. The longer I work in this industry, the more it seems to me that the markets are *mostly* random, and my only hope for making money is to tease out some small source of predictability or inefficiency and then exploit it for everything I can until it inevitably goes away.
Another thing I'm learning is that most traders in the world have no idea what they are doing. Check out the forums on <a href="http://elitetrader.com/">Elite Trader</a>. You know these guys are awesome because they are <i>elite</i>.
I added a sidebar to my page that indexes all of my shared items from Google Reader. You can subscribe to my share if you like the sites and you'll keep getting new awesome links filtered by yours truly.
Dave Y.: 2008-02-28 08:39:26
Good to see The Black Swan is having a positive effect on you. I'll have to check out the link thing when I'm not on my phone.
Oh, and both our site designs are by the same guy. ;)
Baron Robertson: 2008-02-28 10:18:18
Since Elite Trader is an open online community for traders to interact with each other, the whole point would be for you to contribute, not insult everybody else by saying they have no clue what they are doing. Consider this as an open invitation to come to Elite Trader and bestow some of your money-making trading wisdom on us at any time. We're waiting....
Matt: 2008-02-28 13:57:02
Hi Baron,
Thanks for reading my blog. I'm sorry if you felt insulted by my comment. I'd like to clarify that I think *most* traders have no idea what they are doing. I'm sure that of the more than 92,000 members of elite trading, some of them have found an edge in the market. The main problem I have with sites like elite trading is that they encourage people to trade without really considering if they have any chance of making money. Most of the systems I see promoted are worse than random trading. The only people that benefit from that kind of behavior are tools vendors, electronic brokerages, and exchanges. I fully admit that I have no idea how to make money in the market. If I did I would be doing it and not telling everyone else my strategy. On the other hand I think I do have a workable method for *finding* an edge in the market, even if I haven't found it yet.
Joel F: 2008-02-29 16:41:46
Have you looked at prosper.com at all? They have an API and downloadable XML of all their loan, credit report, and default data...I'm no professional trader but in my "hobbyist's" opinion it certainly seems like the Prosper market is not terribly efficient yet.
Matt: 2008-02-29 20:29:41
Prosper.com looks pretty interesting. I know a few people at work that have gotten 10-15% returns just loaning to people doing debt consolidation loans and other safe investments. I wish I knew more about evaluating credit risk because I'd love to make a market like this. I actually looked at making a market on tradesports.com, but the volume there isn't worth the effort.