Framing market behaviour as a battle between bulls and bears has always made me cringe, appealing as it does to some of our least productive psychological tendencies. Our first, automatic response to finding out that a confrontation is underway is to self-identify with one side or the other, a hardwired subconscious process arising from the herding impulse developed deep in our evolutionary past. Psy-Fi blog does a typically brilliant job describing the negative aspects of herding on trading performance HERE, saving me from elaboration.
Imposter that I am, I don’t just write shit down and expect people to believe me, I co-opt respectable people without their permission for support. Thankfully, in this case there exists what I think as the best general-focused blog post ever written on how to think healthily (you read that correctly), The Wrong Lesson of Iraq by The Last Psychiatrist written in 2007. Ostensibly about the masses’ response to the alleged manipulation of popular opinion by the Bush administration, the post is much more about the dangers of “splitting” – the broad brush psychological tendency to choose sides – and the resulting laziness and poor analysis that logically results. Conveniently, the GOP/Independent/Democrat trialectic has a close market analog in Bullish/Neutral/Bearish which will make comparisons easier.
The Last Psychiatrist writes as follows:
Splitting says: Bush is all bad, period. Nothing he does is good, and if it is good, it is from some malicious of selfish motivation, or an accident related to his incompetence to even be self-serving. Similarly on the other side, liberals are weak, corruptible, treasonous.
Splitting is always polar; once something is declared “all bad,” an opposite is necessarily declared all good. Importantly, this isn’t a comparison between the two– he is bad, but she is better; it’s perceived to be two independent, unconnected, assessments, even though to anyone else looking from the outside, they are so obviously linked. So hatred of, say, liberals is thought to be independent of your preference for Bush, but in reality it is only because you hate liberals that you like Bush. The hate comes first. And this splitting makes it nearly impossible to acknowledge any of Bush’s faults.
Yes, this will take some unpacking. A decent start would be the equivalence of the terms “permabull and permabear” with “far left and far right” as in each case the namecalling is simultaneously a statement of affiliation and an invitation to dismissal. If I’m bullish, there’s no way I need to read Dylan Grice because the term “permabear” identifies his reports as a market strategist version of Mein Kampf, the ravings of a lunatic. The same is true in reverse of China sceptics and Jim O’Neill (*raises hand sheepishly*). Note the defensive nature of these decisions – branding an opposing view as insane or misguided saves us from testing our own theories, market or policy-oriented. Paragraph two of the excerpt suggests also that the basis of our market outlook may be intensified, or even formed from, a general, personality-based dislike of either optimism (“that idiot always has the pom poms out”) or pessimism (“the bond market has predicted 45 out of the last 3 recessions so i don’t follow it”).
Now the key part:
But splitting is rarely about the target, it’s a convenient heuristic to get the subject out of having to accept the complexity and totality of the other, and of their own emotions about their environment. In short, when things get heavy, it’s easier to just label black and white and work from there.
Splitting is the reaction to intense anger and frustration in those people who discover themselves to be powerless.
Since it’s all Bush’s fault, there isn’t actually any underlying problem to deal with.
Change “other” to “market” in the first sentence and we can pretty much print out and frame it as one of the best pieces of trading/investing advice ever written. Psychologically it is much, much easier for unsuccessful traders to claim the market is fixed rather than recognize that it is merely (at that stage of their trading career) beyond their comprehension, that more boring, tedious studying must be done and that ignorance is “the underlying problem to deal with”. The emphasis on “their emotions about the environment” is also clearly applicable to trading and investing, as numerous commentators detailing the unproductive nature of investing emotionally have pointed out.
No metaphor is perfect and there are limits to the GOP/Dem Bull/Bear comparison. The limiting aspects of labelling and framing, however, are evident in both areas. Knowledge of how markets actually function will be limited by self-identifying with any group – bull, bear, inflationista – in the same way that ideologues will always be incapable of producing effective foreign policy beyond bombing the living crap out of people until they submit, likely temporarily, to force. Persistent success in investing and trading requires a nuanced, detailed understanding of factors affecting asset performance that is not generally possible by just being a good teammate with fellow bulls or bears.