Market Psychology

Fooled by Randomness by Nassim Taleb

Q: How much of success is luck and how much is skill?

Taleb says he doesn't have an answer to this; all he's saying is that there's at least some luck involved, which isn't saying much.

Q: What exactly is "skill"?

- Pattern recognition(?)

Investment Psychology Explained by Martin Pring

Rec'd by Michael Burry:
http://www.siliconinvestor.com/readmsg. ... gid=267974
1996/9/10

Martin Pring's book on Investment Psychology is good but again mostly common sense; I got a few pearls out of it though.

http://www.siliconinvestor.com/readmsg. ... gid=455371
1996/11/16

(responding to a request for books on investment psychology): How about Investment Psychology Explained, by Martin Pring & Smarter Trading, by Kaufman. Both good, and worthwhile for a few nights.

Psychology of the Stock Market by G.C. Seldon

The full book can be read here:
http://www.archive.org/stream/psycholog ... 8/mode/2up

Contents:
I. The Speculative Cycle
II. Inverted Reasoning and Its Consequences
III. "They"
IV. Confusing the Present with the Future--Discounting
V. Confusing the Personal with the General
VI. The Panic and the Boom
VII. The Psychology of Scale Orders
VIII. The Mental Attitude of the Individual

Other

25 Investment Classics by Leo Gough

http://www.amazon.com/25-Investment-Cla ... 0273632442

This book is basically like a collection of Amazon reviews. There's really no difference in 1) length or 2) depth of analysis between his treatment of each book and what you'd find in the lengthier reviews you'll see out there. I actually think you'll probably find better analysis in the amazon reviews out there than in his write-ups.

The books in it:
Against the Gods by Bernstein
The Art of Short Selling by Kathryn Staley
Barbarians at the Gate
Beating the Dow by O'Higgins w/ Downes
Beating the Street by Lynch
Buffett: The Making of an American Capitalist
Common Stocks and Uncommon Profits
Confusion de Confusiones by Joseph Penso de la Vega
Extraordinary Popular Delusions and the Madness of Crowds
45 Years in Wall Street by Gann
The Great Crash 1929 by Galbraith
How to Lie with Statistics by Darrell Huff
The Intelligent Investor
John Maynard Keynes Volumes 1 and 2 by Robert Skidelsky
Liar's Poker
Market Wizards
The Money Game by Adam Smith
The Money Masters / The New Money Masters
A Random Walk Down Wall Street
Reminiscences of a Stock Operator
Soros on Soros
Technical Analysis of Stock Trends by Edwards and Magee
Think Like a Tycoon by WG Hill
Trader Vic
Where are the Customers' Yachts?

Lessons in Disaster by Gordon Goldstein

I checked this out of the library after I read an article in the NYT that said that Rahm Emmanuel was making everyone in the White House read this book while they were deciding whether to put more troops in Afghanistan. this book is serious knowledge.

***********
Main Lessons
***********

QUESTION EVERY ASSUMPTION WHEN MAKING A BIG DECISION
So far the big thing I’m learning from this book is that you NEED to question ALL of your assumptions when you’re making a big decision. These guys went into this war without thinking twice about the domino theory, or the effectiveness of the escalation, etc. In fact, there were numerous reports saying that they were making a huge mistake; but they went along anyway.

BEWARE PEOPLE WHO SAY THINGS WITH CONFIDENCE WITHOUT EXPERTISE
I also was amazed at how Bundy could have no expertise or experience and yet confidently give advice on questions of war; I shouldn’t really be amazed, though, because this is a common human tendency (I obviously do it as well). This book just makes it clear how dangerous such a tendency can be. Sowell argues for this in “Intellectuals and Society” (that intellectuals are a huge problem because they espouse confident opinions about issues on which they have little expertise).

GIVE EXTRA WEIGHT TO THE OPINIONS OF CLEAR EXPERTS
Relating this to my own life, it really made it hit home for me that I should really give a lot more emphasis to what experts say over my own ideas on complicated subjects with which I am not especially familiar. I think a big problem, though, is determining whether or not an expert is really informed in such a way that he can tell you that a particular line of action which he is unfamiliar with (but falls roughly within the domain of his expertise) is a good or bad idea. So, for example, it seems like it would’ve been a good idea to pay heed when the military ran its war-games and when the CIA did its research report (all of which predicted disaster), and concluded that an escalation in Vietnam would probably be a bad idea. But when a top-level military man or CIA director without any particular knowledge of Vietnam was advocating an escalation, then it would’ve been wise to be skeptical for the very reason that those men did not have a well of knowledge on the particular matter at hand.

SEPARATE YOURSELF FROM PEOPLE YOU THINK ARE ADVOCATING BAD IDEAS
I was impressed at how sophisticated JFK and Bobby Kennedy were, but was a little confused about why JFK would allow himself to be surrounded with people who were very strongly advocating something he saw as a disastrously bad idea. I suppose the complexities and loyalties of the situation (as well as the advisors’ expertise in other areas) made it unlikely that JFK would distance himself from these guys.

I liked how the author broke the book into “lessons” rather than chapters:
1. Counselors Advise but Presidents Decide
2. Never Trust the Bureaucracy to Get It Right
3. Politics Is the Enemy of Strategy
4. Conviction Without Rigor Is a Strategy for Disaster
- this was bundy's big mistake
5. Never Deploy Military Means in Pursuit of Indeterminate Ends
6. Intervention Is a Presidential Choice, Not an Inevitability

*************
Notable Quotes
*************

[142-143]
“Look, sir, I don’t know anything about firepower,” Thomson explained to Bundy. “But this document is trying to tell us that we can bomb them into submission, and my fear, since I know China, and I have learned something about Indo-China, is that those people we’re bombing will survive our taking out everything they’ve built over these past many years, their infrastructure and so forth.” The insurgency will retreat into the jungle, Thomson predicted, evading and enduring a bombing campaign for as long as necessary. Why? “Because they know they have no place to go. And eventually we will go home. And so I’m not sure this is going to work. … They know that we know that we will have to go home, someday, quite soon.”
Bundy sat in silence, staring at Thomson and pondering his reply. “Well, James,” he said finally, “that’s a good point. You may well be right. Thank you so much.”

The Lessons of History by Will Durant

I got this book because Ray Dalio said it was one of his favorite books in a Charlie Rose "Green Room" segment. I'd read a good chunk of Will Durant's "The Story of Philosophy" while in high school and found it boring b/c of his writing style (too ornate, not enough like the way people actually talk) and because, starting at around Spinoza, the ideas the philosophers are talking about got too vague for me to feel like I had a clear idea of what they meant.

Here's a link to a YouTube upload of the Charlie Rose segment where Ray Dalio mentions it:
https://www.youtube.com/watch?v=EWmuQXnokjw&t=1m21s

You can find a pretty good summary of the book here:
http://www.maystitans.com/wp-content/up ... istory.pdf

Thoughts:

- it's the same ornate prose I remember from his "Story of Philosophy"
- he doesn't identify the lessons as clearly as possible, like writing "Lesson 1 is Blah Blah Blah". You need to hunt around a bit to find the lessons he seems to be drawing from the stuff he talks about.

Contents:
Preface
1. Hesitations
2. History and the Earth
3. Biology and History
4. Race and History
5. Character and History
6. Morals and History
7. Religion and History
8. Economics and History [52-57]
- economic aspirations have underlain a whole bunch of history [52-53]
- but economic aspirations may not be the whole story behind big episodes of history, eg religious fervor [53]
- "every economic system must sooner or later rely upon some form of the profit motive to stir individuals and groups to productivity" (54)
- "Since practical ability differs from person to person, the majority of such abilities, in nearly all such societies, is gathered in a minority of men. [I don't see how the second thing follows necessarily from the first] The concentration of wealth is a natural result of this concentration of ability, and regularly recurs in history." [I agree that concentration of wealth regularly recurs, but I'm not convinced the reason is all and only what he says it is.]
- the story of Solon on pp55-56 is very interesting. Basically the disparity in Athens between rich and poor got so high that Solon needed to redistribute income and institute reforms to keep the poor from revolting. The lesson, I guess, is that if a given group1 has the ability to cause problems, and seems likely to do so, the other group2 may be better off just giving that group1 some of what they want to relieve the likelihood of their doing something bad to group2. It seems like the smart thing for group2 to do is to give group1 just enough so that group1 doesn't cause problems.
- after showing that there's been a recurring pattern of 1) concentration of wealth followed by 2) a push for redistribution, he ends by calling this pattern "the slow heartbeat of the social organism", in other words suggesting that the underlying incentives in societies will continue to push in the direction of seeing this kind of cycle. That's a pretty interesting idea that I don't remember having seen before.
9. Socialism and History
10. Government and History
11. History and War
12. Growth and Decay
13. Is Progress Real? [95-102]
- they suggest that it would be possible to "improve our purposes" beyond the satisfaction of our natural inclinations and that we aren't doing it (95)
- from 96-97 they ask a bunch of devil's-advocate-style questions that might suggest that we haven't made progress
- they don't think there's been an increase in happiness (97); they assert children are happier than adults (98)
- it could be possible to regress as well as progress; you could progress in one area and not in another (98)
- they do think that "the average man has increased his ability to control the conditions of his life" (98) eg longer life spans
- they then offer a list of rhetorical questions that would suggest that we have made progress (99-100). It's strange though b/c they talk a lot about increases in comfort, food, etc. that would presumably mean being happier. But just 2 pages before they said that people aren't happier. Maybe they unconsciously mean the word happy to refer to something else, like the tendency of people to evaluate their lot in life by comparing themselves to the people around them.
- he ends up defining progress as the increasing "abundance, preservation, transmission, and use" of knowledge and art. History is "the creation and recording of that heritage [knowledge+art]". (102)

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