Sunday, 15 January 2012

Flawed Hindsight

The Swansea City v Arsenal game this afternoon was the sole XX Draw selection from this weekend's fixtures. The Under 2.5 goals price dropped steadily from earlier in the week at 2.0, to 1.79 at kick-off, and as you might expect, the draw price similarly dropped from 3.85 to about 3.45 before kick-off. As a trader, being able to lock in a profit before a ball is kicked is ideal, and while it seems to me that more often than not, the prices on the XX Draw selections shorten, that may well be a case of flawed hindsight. I will be adding a couple of new fields to my spreadsheet to record the prices when the selection is identified, and the price at kick-off, although the latter may be problematic since despite what may appear to be the case, I am not trading 24 hours a day.

I was pleased to see that Peter Nordsted's Drawmaster is making a return in 2012, although somewhat disappointed that Pete still feels the need to force three selections each week, when there may be none, there may be ten, or more usually some number in between. He's already off to a good start though, finding Aston Villa v Everton yesterday, and today he was also on the Swansea City v Arsenal game, as was Griff who found Liverpool v Stoke City at 4.7 yesterday and is improving his ROI. Griff deserves a lot of credit for hanging in there after a poor run. In the end, we were all wrong, as Swansea conceded more than one goal at home for the first time this season, but scored three to win 3-2. The draw price traded as low as 2.26, after being 2.56 / 2.58 at half-time. 1.9 appeared on the lay side at 2-2, but Swansea's third goal came so quickly that nothing was matched.

A good weekend for Football Elite with two winners from three selections, Ajaccio (2.88) and Chievo (2.2) both won, and a return to the green on the season.

Mark J's selections returned a profit with three winners from five, but no winners from eight draw selections for Geoff, and none from six for the Green Pullover, although the Milan derby is yet to come.

I've been somewhat slack about updating these results at Gold All Over, but will try and find time once the weekend's games are complete.

I mentioned flawed hindsight earlier, and it's important that as traders / gamblers we understand this trick of the mind. Maintaining accurate records is essential. We all remember more of our wins than our losses, and the reason is selective memory - the way we remember things. From the passage below, most of us will also recognise the 'hindsight bias' - looking back and thinking that something was far more predictable than it actually was at that time.
Our memories are shaped to a great extent by the present and we frame the past using this knowledge. The implications for our experiences of investing in a horse, greyhound or football team is fascinating.

According to a recent paper by a firm of financial analysts, flaws of memory impair our ability to learn from the past and contribute to our poor financial decision making. The report states bad memories tend to be blocked out by good ones. Just as we find it easier to remember the types of bet on which we have won money, we block out our poor financial decisions with other memories that are more pleasant for us. This conditions us to become overconfident.

Another memory flaw gives rise to what is termed “hindsight bias”. This is the tendency to look back and see events as being more predictable than they were before they took place.

The dangers of hindsight bias usually get learned the hard way. It promotes overconfidence by fostering the illusion that the world is a far more predictable place than it is in reality.

This gives gravity to the process of diary keeping whereby our bets and the grounds, the thought process, for them are logged. These writings will allow us to learn from previous mistakes. It will be harder for you to convince yourself that you knew something all along when you are faced with the evidence of how events unfolded at the time.
From a trading perspective, selective memory may be helpful short-term - a big loss can be confidence destroying unless you place it context - but in the long-term, it can be harmful - the complete picture provides an essential reality check. Keeping records is essential. The mind plays tricks on us all, but spreadsheets don't lie.

The excellent Stock Market Trading blog had a piece on this subject a while back too. You can read it here:
Trading is one of those things that really requires a selective memory.

The same kind of selective memory that I needed when I was on the dating scene. I chose to ignore the bad experiences I’d had with certain girls, and I stayed in the game long enough to find the wife of my dreams.

It’s the same kind of selective memory needed on the golf course. That bad shot from a few holes ago needs to be suppressed for this next one across the water hazard. Otherwise, you’re toast.

Some traders never develop this skill, unfortunately. They cling to the past, unwilling and unable to let it go for the sake of making that next trade. Getting faked out of a good trade last week prevents them from taking a similar setup this week, afraid it will hurt their account once again, or worse, their ego.

They have a good memory, yes, but they’re not using it in a good way.

That’s no way to trade. Clinging to memories which don’t empower you is a form of recency bias, and it can really prove costly in this game.
As an aside, I find the activity of record keeping in itself is good for discipline in other areas of life, whether it's recording your weight on a daily basis, logging your exercise activities, alcohol intake or updating your net worth spreadsheet. The mere process of knowing that everything you do is tracked helps you to stay disciplined.

No comments: