How to trade precisely the right stocks at all possible times
Here is a link to the audio of the South By Southwest 2006 presentation by Harvard’s Daniel Gilbert on the psychology of probability estimation (via boingboing). It doesn’t talk specifically about trading, but if you look at it from a trader’s perspective it makes perfect sense and offers some great advice. It even starts off with an example of expectancy, where a game of flipping a coin costs $4 to play, and if heads comes up you are paid $10:
The odds of you winning my bet are one half - 50%, the value of winning is $10, and hence the expected value is 5$ and since you only had to pay $4 to play, that’s a damn good bet.
There is a part about how the brain detects changes, which is interesting to traders:
…The human brain does not detect stimuli, it detects changes in stimuli… The brain is made to detect changes… but this tendency to detect changes causes us to be irrational when we are judging value. We should care about price, not changes in price.
For example, imagine you wanted to go on a Hawaiian vacation and there was a travel agency near your house and they have a $2000 vacation that is on sale for $1600. Would you buy it? Well, when people are asked this question, by and large they say yes. Now I’m going to change the question a bit. The $2000 vacation is on sale for $700. You go home and think it over and when you return, the trip is $1500. Would you buy it? Most people say no… They would rather have the more expensive vacation that was never cheaper. In other words, we like a bad deal that used to be a horrible deal better than a good deal that used to be a great deal.
