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Tuesday, October 21, 2008

We Are Not Psychohistorians

"PSYCHOHISTORY–...Gaal Dornick, using nonmathematical concepts, has defined psychohistory to be that branch of mathematics which deals with the reactions of human conglomerates to fixed social and economic stimuli....

Implicit in all these definitions is the assumption that the human conglomerate being dealt with is sufficiently large for valid statistical treatment. The necessary size of such a conglomerate my be determined by Seldon's First Theorem" - Forward the Foundation, Isaac Asimov

I recently discovered that I actually have something in common with Paul Krugman, the Nobel Award winning economist. Sort of blew me away when I discovered this.

We both have a love of the Isaac Asmiov "Foundation" series. And both of us love economics, because it bears some similarities to a fictional branch of science called Psychohistory within those books. If you have not read the series yet? It is a piece of classical literature, and was one of the best selling trilogies within the 20th century. I highly recommend them. You can start with the book "Foundation", which you can find to the right in the section called: "From My Personal Library"

Regardless, in the "Foundation" novels, there is a fictional branch of social mathematics called: "Psychohistory". It is a fictional branch of mathematics, that directly and very specifically predicts what will occur centuries into the future future when the psychohistory scientist observes the social, political and economic flow of at least 9 or 10 billion humans. Now, of course, there is no such thing as psychohistory. As Paul Krugman notes, the closest we can come? Is the science of economics. The social study of how goods, services and information flows within a given area.

But in the midst of real, day to day economic 'flow'? You have people like myself. Traders. People who are looking to profit from the exchange of goods. And at times? Traders believe that they are psychohistorians. Whether it be in the short term, or the long term, traders tend to believe that they can absolutely predict the future. The best of traders and investors try to eliminate this from their psyche; and this predicliction is found in almost every trader, including myself. As much as I try to eliminate this delusional inclination? It still pops up. The worst of traders? Truly believe they can predict the future. That they are psychohistorians. Visit any stock forum. Or visit "Google Finance" discussion threads. It's replete with people who believe they know exactly what is going to happen in the future.

And this gives rise to a bias. A bias, when discussing trading or investing? Is a preference, a tendency towards a particular type of position. I discuss this, and how to actually use your bias profitably, in the following vlog entry. How to exploit your bias, instead of allowing your bias to exploit you ...

(Video Included. If you're seeing this from Email subscription? Click on the Title Link in the Email to View the Video ...)

I did mention in the vlog, that I wouldn't be surprised to see a relief rally form. Now mind you, I have no money down on that thought. It's just an opinion. In order for me to believe that a relief rally is truly forming? I think the market would need to close above 9450 on the DOW Jones Index.

I hope to see everyone on Monday. Stay safe.

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Note: This is not an investment or trading recommendation. The losses in trading can be very real, and depending on the investment vehicle, can exceed your initial investment. I am not a licensed trading or investment adviser, or financial planner. But I do have 12 years of experience in trading and investing in these markets. The Challenge accounts are run for the education of other traders who should make their own decisions based off their own research, and tolerance for risk.

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