Friday, July 31, 2009

Forecasting, Trading, Psychological Pain

Psychological costs and our Biases towards trying to buck the trend

So I had a deep ponder about why I shorted the ASX200 whilst its in an obvious trend upwards, and despite the technical analysis that might've supported my decision to short, maybe there's a psychological reason for why people short in an uprising market.

If you go long in a rising market and you are wrong, the psychological pain of being wrong in such an 'easy' environment is actually much greater than pain being wrong whilst trying to be a contrarian.
There probably is somewhat a egotistical nature to being 'right' when you are going against the trend, as the only way u make money is if you correctly 'time' the inflection - the point where the trend breaks - this gives you automatic respect in the markets - like calling the fall in US housing when the bubble was still growing.

This can explain why economists can be much more bearish economically, because they pay no price, whether financial or psychological if they are too early or too late with the 'consensus'.