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- 🔔 The Wisdom Of Crowds & The Art of Being Wrong
🔔 The Wisdom Of Crowds & The Art of Being Wrong
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Are you often wrong?
Perhaps you need to read these books... 👇
Kidding!
In case you don't know the author, James O'Brien hosts a daily talk radio show on LBC, where callers phone in so that he can rip their arguments apart and make them look stupid.
They're wrong (and stupid), he's right (and clever)
He is the chosen one.
Chosen by me. To make a point.
See, I used to think he was really smart.
Back in the days of Brexit, he was excellent at articulating his arguments and highlighting how poorly informed many peoples' (Brexiteers) views were on the subject.
As a remain and reformer (at the time), it fed my biases and made me feel good.
Good isn't strong enough actually.... I felt Superior. A Being Of Superior Intellect
Then it was November 8th 2016: Election day in the US...
In the lead up to the result, I was a complete noob and long EURUSD.
Initially it went well.
I closed out an over-leveraged trade nicely in profit, then opened a brand new over-leveraged trade once Trump was confirmed.
The dollar rallied.
How could this be? Trump would be terrible for the country, and the economy, the market must have got it wrong...
I doubled the position.
Don't they realise he's won?! Ha! When they finally figure it out I'm going to make SO MUCH MONEY...
The dollar continued rallying...
It got worse.
The only sensible thing I did that day was close out before the margin call came.
Pain was felt, lessons were learnt and I was absolutely HOOKED...
I mean... If I can lose money that fast, surely I can make money that fast too...?
Ridiculously naive.
On the positive side, 2016 was the year that I started to learn about being wrong.
I was wrong about Brexit, wrong about Trump and, most importantly I realised just how many of my assumptions were based on... absolutely nothing.
I was NOT A Being Of Superior Intellect 😢
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It was hard to accept...
So, I turned to the markets. If I could think like THEY do, I could be more right...
I believed that within the markets there was wisdom.
It's where the really clever people were. If they were making money trading, they must be able to accurately forecast the future, right?
Turns out that was also...
Even though the famous jelly bean experiment shows the collective wisdom of the crowd is hard to beat (especially in a bounded game such as guessing jelly beans in a jar), real life isn't like jelly beans.
People will talk about their guesses with friends, colleagues, acquaintances, online chats...
Influencers who guessed correctly last time are given a platform, and the crowd might decide to mimic them instead of going with their own view...
The guesses are no longer organic...
Let's take a snippet from 'Animating Mr Market' by Michael Maoboussin discussing Ben Graham's thoughts on forecasting by crowds.
When posed the question about whether Wall Street professionals are better at forecasting than others, here’s what Ben Graham said:
Well, we’ve been following that interesting question for a generation or more. And I must say frankly that our studies indicate that you have your choice between tossing coins and taking the consensus of expert opinion and the results are just about the same in each case.
Your question as to why they are not more dependable is a very good one and an interesting one and my own explanation for that is this:
Everybody on Wall Street is so smart that their brilliance offsets each other.
And that whatever they know is already reflected in the level of stock prices, pretty much, and consequently what happens in the future represents what they don’t know.
The paper is an excellent read on the efficiency of 'the crowd' over the long term, and their frequent inefficiency in the short term.
Graham’s point, to which we will return, is that the intelligent investor uses Mr. Market’s swings as information that he or she can take advantage of, rather than being influenced by the price action.
This, of course, is very difficult to do psychologically
Very hard. You're arguing with the collective wisdom of the crowd.
"You're ALL wrong and I'M right"
It isn't about winning the argument though. The use and abuse of logic won't make you money... 👇
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The art of being wrong is acceptance.
Accepting that you're likely to be wrong often.
Noticing when you're overly emotional and realising how that can impact your decisions.
It's being self-critical in the right ways, trying to figure out where you made a mistake, what you missed, and how you might prevent it from repeating...
I saw this quote the day after the Bank of England didn't hike 👇
“Pathetic communication from the BoE. Bailey basically marched us up the hill, and then voted to keep rates steady,”
Even though I'd disagree with that statement, it's the response I really wanted to highlight.
Zero introspection, pure emotion, not my fault.
It's a natural human response. Maybe the comments were taken in the heat of the moment. It's just a momentary snapshot in time after all.
So, what's the lesson... What is the art of being wrong?
Focus all of your efforts on being less wrong rather than being more right.
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