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"Probabiliy neglect" phenomenon

  • #1
  • First Post: Edited 6:31pm Jun 30, 2007 6:30pm | Edited 6:31pm
I'm reading Al Gore's "The Assault on Reason" and in the first chapter he brings a very nice information, that made me think and also want to share here.

Social scientists have found that when confronted with either an enormous threat or a huge reward, people tend to focus on the magnitude of the consequence and ignore the probability.

Of course, this phonomenon applies to a large amount of contexts and situations, but, in forex trading, how many times haven't we:

- placed trades against a major trend just because "this is absolute top/bottom, I'm gonna make 500 pips out of the turnaround" and met Ms. Stoploss deeper and deeper

- gotten out of not that bad a trade but the fear overcame the reason ("I'm gonna get my margin call today with this #$@%%$#@) and we lost sense that it was a temporary drawdown.

Think about it
  • #2
  • Jun 30, 2007 6:42pm Jun 30, 2007 6:42pm
Don't waste your valuable time and money reading Al Gore's garbage.
  • #3
  • Jun 30, 2007 6:53pm Jun 30, 2007 6:53pm
Quoting danegg7
Don't waste your valuable time and money reading Al Gore's garbage.
I do not encourage comments like this, which denotes that the MORON has read only the first line, and hasn't read that the book was mentioned as the SOURCE of the information - only. This is not Al Gore's own statement.

Please, go waste your valuable time somewhere else.

Thank you.
  • #4
  • Jun 30, 2007 7:13pm Jun 30, 2007 7:13pm
Cesarnc,

Sounds a little like the Pleasure and Pain theory. Most people will do more to avoid pain than they will to gain pleasure.
  • #5
  • Jun 30, 2007 7:39pm Jun 30, 2007 7:39pm
Quoting danegg7
Don't waste your valuable time and money reading Al Gore's garbage.
I doubt you've read it so you're in no position to call it "garbage".
  • #6
  • Jun 30, 2007 8:34pm Jun 30, 2007 8:34pm
Quoting cesarnc
I'm reading Al Gore's "The Assault on Reason" and in the first chapter he brings a very nice information, that made me think and also want to share here.

Social scientists have found that when confronted with either an enormous threat or a huge reward, people tend to focus on the magnitude of the consequence and ignore the probability.

Of course, this phonomenon applies to a large amount of contexts and situations, but, in forex trading, how many times haven't we:

- placed trades against a major trend just because "this is absolute top/bottom, I'm gonna make 500 pips out of the turnaround" and met Ms. Stoploss deeper and deeper

- gotten out of not that bad a trade but the fear overcame the reason ("I'm gonna get my margin call today with this #$@%%$#@) and we lost sense that it was a temporary drawdown.

Think about it
Part a) is because people are actually more sensible than social scientists; they focus on expectations and risk rather than probability, which is ill defined at best in most serious RL events. I tend to drive cautiously because I know the possible consequences of driving overly fast, not that my probability of having an accident is very high.

Tht's very different however than traders who pray things will turn around - they are, in fact NOT thinking about consequences (or probability) at all....
  • #7
  • Jun 30, 2007 8:39pm Jun 30, 2007 8:39pm
Yes, we see this all the time. It is because people often operate from the perspective of fear and greed. when we are fearful, we tend to pull our profits when we see them. This is exactly the time that we should let our profits run until there is actually a reason to close the trade. and when we are approaching our stop, we move it in the hope that the market will come back and of course this is exactly the time we should cut the loss short.

Our instincts act against us and can cause us to exit when we should be holding on and to hold on when we should run for the exits.

The way around this is to realize no individual trade is important. Only the large number of trades are important, if we indeed have an edge. However, to do this, we must be resist our evolutionary history of fear and greed.
  • #8
  • Jun 30, 2007 8:44pm Jun 30, 2007 8:44pm
Quoting cesarnc
Social scientists have found that when confronted with either an enormous threat or a huge reward, people tend to focus on the magnitude of the consequence and ignore the probability.
This is why diseases like SARS, West Nile, Mad Cow, etc. get all the attention, but ones like TB, food borne illness, diabetes, etc. get ignored until they reach an epidemic level, and its too late. The former are new, exotic diseases that have killed many of their victims, but unlike the latter, your chance of getting them is about the same as getting killed by a toaster falling out of a window.

I went to a lecture on re-emerging diseases, and the best analogy of the two groups of diseases were this:

-- SARS, West Nile, bird flu, etc. are like celebrities. They get all the attention, they're new and sexy, and they make big impacts.

-- TB, E. Coli, Staph, etc. are like your next door neighbors. They're old and dumpy, they've been around a while, and nobody pays attention to them.

However, your probability that you will meet your neighbors (and get infected by them) is far more likely than you will meet a celebrity.
  • #9
  • Jun 30, 2007 8:48pm Jun 30, 2007 8:48pm
Quoting danegg7
Don't waste your valuable time and money reading Al Gore's garbage.
Hello.. this is the future calling.. you lose.
USD Est Non Mortuus
  • #10
  • Jun 30, 2007 8:51pm Jun 30, 2007 8:51pm
Quoting HalifaxCB
Part a) is because people are actually more sensible than social scientists; they focus on expectations and risk rather than probability, which is ill defined at best in most serious RL events.
And they even ignore the probabilities when it spelled out in front of them. Take the lottery for example: people always focus on the huge jackpot, but if they read the fine print on the ticket, it says that the probability of winning is astronomically low. It's because the risk/reward is something more tangible than probability, which is an abstract concept.
  • #11
  • Jun 30, 2007 9:14pm Jun 30, 2007 9:14pm
Quoting bluebuddha
And they even ignore the probabilities when it spelled out in front of them. Take the lottery for example: people always focus on the huge jackpot, but if they read the fine print on the ticket, it says that the probability of winning is astronomically low. It's because the risk/reward is something more tangible than probability, which is an abstract concept.
No, it's just that people don't value everything in their lives in terms of simple numerical profit and loss (thank goodness). Quite often just the taking a risk - even when there is no easily measurable reward - is satisfying in itself, even when you fail.
  • #12
  • Jun 30, 2007 10:19pm Jun 30, 2007 10:19pm
Taking a risk and the fear of taking a risk.

+ + +

I do drive fast but within appropriate risk parameters. Same as always trading with stops.
  • #13
  • Jun 30, 2007 10:35pm Jun 30, 2007 10:35pm
Quoting cesarnc
I'm reading Al Gore's "The Assault on Reason" and in the first chapter he brings a very nice information, that made me think and also want to share here.

Social scientists have found that when confronted with either an enormous threat or a huge reward, people tend to focus on the magnitude of the consequence and ignore the probability.

Of course, this phonomenon applies to a large amount of contexts and situations, but, in forex trading, how many times haven't we:

- placed trades against a major trend just because "this is absolute top/bottom, I'm gonna make 500 pips out of the turnaround" and met Ms. Stoploss deeper and deeper

- gotten out of not that bad a trade but the fear overcame the reason ("I'm gonna get my margin call today with this #$@%%$#@) and we lost sense that it was a temporary drawdown.

Think about it
That was me this week. I took my loss and learned something new, and I will keep on learning how to become a better trader.

Nice post cesarnc........
  • #14
  • Jul 1, 2007 12:57am Jul 1, 2007 12:57am
Quoting LuckyLurker
Hello.. this is the future calling.. you lose.
How'd ya figure that? 20 years ago we were all going to freeze to death in a new ice age, 10 years ago we were going to be irradiated by the giant hole in the ozone, now we are all going to drown. It's only a fool that does not learn from the past, all of these things are just hysteria for the chattering masses used to forward political agendas, anybody who can't see that, in my opinion, loses.
The breaking of a wave cannot explain the whole sea.
  • #15
  • Jul 1, 2007 3:22am Jul 1, 2007 3:22am
this is also an very intresting experiment, i wounder how many times it happend here, on ff

http://www.youtube.com/watch?v=DKivdMAgdeA

PS. i couldn't manage to put the video here...
"Abandon all hope, you who enter here" La Divina Commedia, Dante Alighieri
  • #16
  • Jul 1, 2007 4:36am Jul 1, 2007 4:36am
Quoting Craig
How'd ya figure that? 20 years ago we were all going to freeze to death in a new ice age, 10 years ago we were going to be irradiated by the giant hole in the ozone, now we are all going to drown. It's only a fool that does not learn from the past, all of these things are just hysteria for the chattering masses used to forward political agendas, anybody who can't see that, in my opinion, loses.
You're right, desertification is not an issue in Sub-Saharan Africa, New Orleans is an everyday occurence and oil reserves are at an all time high.

In the past few days we in Britain have had three failed suicide bomb attempts and the biggest flood ever recorded. Nevertheless the vast majority, though slightly more vigilant, seem to be going about their daily lives pretty much as normal (except for the bloke who went waterskiing through Sheffield).

As such I would like to point out that on the whole we seem to be focusing on the probabilities and neglecting the consequence.

Given the evidence in support of and against global warming I'd say on the whole there is a reasonable possibility of it occuring. The consequences of it would be gradually catastrophic.

Neglecting either facet is far more foolish than trying to do something about it and turning out to be wrong.

In other news sales of the T-shirt 'Don't Panic, I'm Islamic' reported a large rise on sunday.
quote of the day: . It's like deja-vu all over again
  • #17
  • Jul 1, 2007 5:14am Jul 1, 2007 5:14am
Quoting danegg7
Don't waste your valuable time and money reading Al Gore's garbage.
Ahh, you look to be a fine steward of God's creation.
  • #18
  • Last Post: Jul 1, 2007 6:44am Jul 1, 2007 6:44am
Quoting bluebuddha
And they even ignore the probabilities when it spelled out in front of them(1). Take the lottery for example: people always focus on the huge jackpot, but if they read the fine print on the ticket, it says that the probability of winning is astronomically low. It's because the risk/reward is something more tangible than probability, which is an abstract concept(2).
(1)- Exactly. Fear of flying also applies.

(2)- As a man told me once: lottery is tax for not knowing statistics
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