Veratasium recently put out a video in which he talked about what it takes to become a master at something. I can highly recommend it, it is an interesting watch. And one of the things he talked about in the video struck home with me a little more than the rest.
The experiment
In the video Veratasium talks about an experiment, in it, they tested rats and humans to see if they would perform the same or not. The test was fairly simple, there are two buttons, a red and a green one. They will randomly light up. And if the rat or human has guessed which one will light up, by pressing it before. They get a reward, food. If they guess wrong they get an electric shock as a penalty.
The thing is the buttons will light up in a random order, but the green will light up in 80% of the cases while the red will only light up in 20% of the cases.
And when the result came in the rats quickly learned that the green button will light up more often. So they chose to only press the green and thus they win in 80% of the cases and get their reward.
The experiment is mentioned at 10:18 in the video, but I recommend watching all of it
The humans, how did we do, we surely have to do better than rats, right? We only guess correctly 67% of the time. The researchers attributed this to our inert ability to look for patterns, and this will make us see patterns even if there are non. But from an evolutionary standpoint being able to see patterns have been truly advantageous. But here it results in us performing vastly worse than rats. Because we think we know the next time it will be red, so we take a chance.
Trading and how we are affected by it
Our innate ability and want to see and find patterns allows us to do these guesses that in a sense are bad for us. And In trading I see this occurring especially when it comes to probably the most talked about thing ever; "buying the dip". We want to buy at the very bottom of a dip. And this makes us look for patterns that are not there, any time the price goes up slightly or sideways I think this pattern part of our brains is screaming to us.
Now, now, buy buy, it is the bottom now, don't miss it! - Our brain
And this leads us to buy in during the fall, thinking the bottom is in. And it allows us to fall into Bull Trapps as well. And these mistakes can be costly, very costly. Especially in crypto where the markets are so volatile and can swing massively both ways in a very short time frame.
Is there anything we can do to combat this? Well, the biggest thing I would argue is awareness, if we are aware of our own tendencies then we are less likely to fall victim to them. They have also had success in treating depression with LSD in controlled environments. It apparently breaks down the pathways and more easily allows new ones to be formed. This might help with preconceptions in general as well. But talk to your doctor before trying, and no self-medicating now you hear. ;)
What is your thought on this, is this something you recognize yourself doing? And if so have you taken any measures to prevent it from getting in your way? Please share your thoughts on this topic in the comments down below. And yes, the thumbnail is a walnut. =)
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See you on the interwebs!
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