Improvement: Reasoning with the Irrational

If you have been involved in financial markets you have no doubt found yourself, at some time, reading a swiftly written article after a particular market move and either crying or laughing at the post-hoc justification given by the author based on some random piece of economic information that suits their headline.

10308533Unfortunately it is not only market commentators that are guilty of this, but traders too. What it comes down to is a blame game, we are human and we love to try and rationalise things in a way that suits us. Sometimes markets go crazy due to un expected imbalanced flows, or in smaller markets a fat finger or a big player putting in a very large order, or something else unpredictable and random that cannot be easily explained and neatly packaged into the appropriate gift wrapping. Markets are created by humans, and even the machines that participate are created and programmed by humans.

Humans are not always rational. Markets are not always rational. Trying to explain strange market moves can often by linked an uncomfortable trading position but can come at any time. A trading position gets uncomfortable when either 1) it is too big, 2) the trader realises they are wrong instinctively but refuses to get out, or 3) both.

When it comes down to it it is really a type of self brain-washing isn’t it? Trying to find excuses, blaming etc. If you find your self trying to reason with the irrational in trading, (or in fact in any walk of life) you really should start asking who you are trying to convince!


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