Your Brain Wasn’t Built to Handle Reality

Republicans — to be precise, 74 percent, according to a CBS News poll — think it’s very or somewhat likely Donald Trump’s offices were wiretapped, even though the White House has offered no evidence to back up the president’s claim that his predecessor ordered the monitoring.

I just love data points like this. They say so much about humans as a species — how we process information, our inability to look dispassionately at a situation, the ever-present cognitive errors, even the challenges of reaching a simple, rational conclusion based on evidence.

There are lessons here for investors who want to better understand how their own minds operate, and how they can manage their own behavior. Each of these bullet points applies equally to the survey respondents cited above and to almost all investors:

No. 1: We seek information to reinforce our beliefs.
As investors, we suffer from the endowment effect: We place a higher value on holdings we already own. Hey, if we bought it, then it must be good! I suspect this is due to a combination of wishful thinking and self-validation. Most people don’t really want to find evidence that their investments are a dog; they hate to admit error. Instead, they seek proof that the original purchase decision was correct.

No. 2: Selective perception prevents us from becoming fully informed.
Not only do we overvalue what we already own, but we tend to seek out information that confirms the value of that holding. Selective perception and confirmation bias see to it that we overlook evidence to the contrary.

Take the claim above — or any investment thesis, for that matter. It should be considered a simple assertion, waiting to be proven or debunked. If you are objective, you should always be seeking and evaluating evidence that disproves your thesis.

That’s not what typically happens. Instead, we create a filter bubble to reinforce support for our holdings. Rather than having an objective, 360-degree view of our investments, we create huge blind spots. As you might imagine, this can lead to expensive errors.

No. 3: The ability to step out of ourselves to see the world from a different angle or perspective is hard.
It’s more than selective perception and confirmation bias: Every buyer should be able to make a case for why that stock should be sold. Every forecaster who predicts a stock-market top should be able to explain why the rally could go on for years. Every pundit who assures us that economic growth will be robust should be able to spot the immediate recession risks.

For every transaction, there are at least two valid points of view: The buyer’s and the seller’s. Investors should take a page from the lawyers and learn how to argue all sides of any investment. You shouldn’t buy or sell anything unless you fully understand the other side of the trade.

No. 4: Emotions get in the way.
When we become aware that we may be looking at things in a biased manner, we at least have a chance to overcome errors. However much we may seek this sort of self-awareness, emotions can trip us up. The tribal nature of politics works against us; so too do fear and greed when capital is at risk. Seeing the world without letting our own feelings color perceptions is a never-ending battle.

No. 5: Objectively measuring data isn’t our strong suit.
If keeping our emotions under control is difficult, evaluating data is even more challenging. Compelling narratives can easily sway us, even when the facts say otherwise. Sports fans and partisans are so deeply invested in a specific outcome that they simply lose the ability to objectively judge reality.

As an example, when confronted with the lack of evidence for the wiretapping claim above, the pushback was “the lack of evidence does not mean it did not happen.” As physicist Carl Sagan once observed, “Extraordinary claims require extraordinary evidence.”

We believe what we want to believe, regardless of the evidence. In the capital markets, the costs of such an approach can be quite expensive.

The alternative leads us to the “Church of the Flying Spaghetti Monster,” or the proposition that the universe was created by a flying spaghetti monster. Since you cannot conclusively disprove this, it therefore could be true. The same logic applies above. Sagan argues persuasively that this is faulty logic.

Barry Ritholtz can be contacted on this link Barry Ritholtz

Barry Ritholtz is the Founder, Chairman & Chief Investment Officer of Ritholtz Wealth Management. He also a Bloomberg View columnist and creator of the Big Picture blog which has ranked as the number one financial blog to follow by The Wall Street Journal as well as The New York Times. 

He is also the creator and host of Bloomberg’s “Masters in Business” radio podcast, and a featured columnist at the Washington Post. He is the author of the Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy  (Wiley, 2009). 

Barry Ritholtz is the Founder, Chairman & Chief Investment Officer of Ritholtz Wealth Management. He also a Bloomberg View columnist and creator o...

foroom lluzers

Veteren member
The Article is informing where traders can mess up with information processing ,traders must trade by processing information. Unfortunately, humans are not very effective information processors. We have a lot of influences that enter into information processing related to trading decisions.Traders who sit infront of screens are more at risk to misprocessing information.

Traders trade their beliefs ,cognitive biases and related distortions ,emotions ,stress responses (rective patterns ,freezing on trigger ,mistakes etc),subjective anylysis ,personality( Perfectionism ,Worry ,Overconfidence,
Negative Thinking.Self-blame etc),state of mind ,current body condition (tired ,fatigue,sleepless) and other influences .The trading phsychology is a complex subject ,the author has given a summary.

It is worth reading this article and applying it to a trading method.The above makes the human brain a poor judge of risk ,the brain is often not in reality with risk and trading is a risky business.The evidence of the truth in this article is ,there are over 3,000 free systems on the internet , more than 95% fail at trading because of the above phsychological handicap of the human mind.

Go back to the article , reread it many times , then compare it with real trading situations ,apply it to traders processiong information in extremely fast moving markets .
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Active member
we have no idea how stupid we are

“We're blind to our blindness...We have very little idea of how little we know...We're not designed to know how little we know.”...

Daniel Kahneman... Nobel Prize Winner and author...The Intelligent Investor.
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foroom lluzers

Veteren member
This is a great article for traders , there are studies to confirm the validity of the orignal article.

UCLA neurophysicists have found that space-mapping neurons in the brain react differently to virtual reality than they do to real-world environments. Their findings could be significant for people who use virtual reality for gaming, military, commercial, scientific or other purposes.

“The pattern of activity in a brain region involved in spatial learning in the virtual world is completely different than when it processes activity in the real world,” “The neural pattern in virtual reality is substantially different from the activity pattern in the real world. We need to fully understand how virtual reality affects the brain.”

To read whole article search on google for "Brain’s reaction new research by UCLA neuroscientists"

foroom lluzers

Veteren member
Just search on google with the following words "blind spot in the eye emotions cognitive biases hippocampus shutdown " .

Screen watching traders often trade their cognitive biases , put on trades based on their biases , instead of following their systems.

This adds to a negative edge for scalpers ,days traders and short tem traders.They find it difficult to
process day trading information.The swing traders can avoid this negative edge

Search on google for" success rate of day traders".


Legendary member
"Daytrading", "Swingtrading" "Scalping" these are all arbitrary terms with arbitrary timeframes. Means NOTHING and only common denominator is "trading" with time.

One other thing larger timeframe bigger loss when you wrong.


Senior member
"Daytrading", "Swingtrading" "Scalping" these are all arbitrary terms with arbitrary timeframes. Means NOTHING and only common denominator is "trading" with time.

One other thing larger timeframe bigger loss when you wrong.