5/04/2007

Mental Models and blindness

Some of the questions I have answered again and again through comments and post or on email about earnings, float, how to find earnings or float, or yearly growth of stock,etc., illustrate very well how mental models affect our behavior and leads to blindness.

Your mental models create blindness to obvious things. Beliefs and assumptions, which do not fit in to your mental models fail to register with you, you are blind to them. When I tell people who have been proudly using TC2007 for years how to find float or earnings or revenue growth in it. The first reaction is of surprise. " Shit, I looked for float all over the web?", "Holy Cow, I have used this software for 5 years, and I never knew there is earnings data in it", "I have been using Yahoo Finance/ Moneycentral/Aol Finance etc for years and I never ever looked at earnings." And so goes the reaction. The information is everywhere, you are just blind to it. All screener allow you to do this.So many sites have float and earnings information.

If your prior mental model was about technical analysis, you interpret the world using your "reality" of technical analysis rules. If your mental model is driven by indicator, you are blind to rest of the things. If you never believed earnings was important in driving price behavior, you would never look at earnings closely. For a given trader , he or she has his or her own "reality" about how markets operate and how his or her own behavior is correct behavior.

Mental models are coping mechanism for the complexity around us. You develop mental models over your life time for different set of facets of your life.As you move and act, as you live your life,and as you learn and master new knowledge and skills you create your own understanding of the world. That is your own interpretation of how the world operates or should operate.Most of the time you are not consciously aware of the assumptions, the beliefs which go in to your mental models.

The primary benefit of developing mental models is that your mental models help you get things done faster. Your behavior and reaction to world around you stems from such simplified, your own "reality" view of the world. Life becomes easier if you can follow the same process. Strongly formed habits lead to a decreased cognitive
load, which frees you up for things that matter more. There in lies a problem. People walk the same road for years, but are bind to many things on it.

Loss of orientation is a natural reaction when faced with a new way of looking at things. In fact in successful commercial communication or art like novel or movie, a skillful plot is used to manipulate peoples mental model, so that thy think in one way and then the surprise is sprung on you.

I find it amusing when people claim they are not influenced by advertising or leaders. Or claim no one can change their behavior. Day in and day out advertisers and marketers change your behavior successfully using just communication. That gets reflected in sales and profit for companies. How do they do it, by skillfully providing you new information which makes you reevaluate your choice of brands. They do it vividly, so that it gets noticed, they do it repeatedly, so that you contemplate on it, they do it in entertaining manner , so that you do not see it as annoyance. All that they use is an argument to change your existing assumptions and beliefs. The result, you buy one product over another or shop at a particular shop. That is behavior, not just attitude change.

Leaders do the same thing. What do leaders do, they change followers mental models. They do it through communication, symbols and arguments. Arguments is the currency of leaders. Using skillful arguments , a leader garners followers, maintains them, and make them do things which he wants them to do. Leaders create alternative reality, the followers strongly believe in it.

If you think about this and look closely, you will see people change their behavior significantly once they start following a leader.They donate to them , they buy their books, they vote for them , they even kill for them. Remember you change your behavior willingly , when you follow a leader.Leader is successful only if he can change followers behavior. Barack Obama will be successful leader, if he gets you to vote for him.

If you want to learn about changing your own behavior, look at how others change your behavior successfully. They do it day in and day out, you are not aware of it. What process do they use. Advertisers , marketers, and leaders change your behavior day in and day out. They do it by manipulating your mental models. If you understand the process, you can change your own mental models using same process.

To trade in a new way requires behavior change. Part of the challenge is, it is self directed behavior change. If it is a directed behavior change, the process is a bit simpler. But a directed behavior change still requires first a submission to the outsider directing the behavior change. That is the reason, you will see in Japanese or Chinese themed movies, the Zen Master first breaking down the disciple by giving menial jobs or impossible tasks.You will see this again and again in movies. Once the disciple surrenders, then the behavior change happens quickly. The Eastern philosophy believes in first emptying the mind and then putting new things in to it.

25 comments:

Semsons said...

Hi again,

I found the post of below in my favorite site: gurufocus.com. Is it possible to anticipate earnings tracking the volume/price before the news is released?. Thanks.

------------------------
I'm trying to develop a model, like reflexivity from Soros, to 'predict' the earnings by the price trends days before the earnings annoucement, my hypothesis is EVER have insider information, and you can make money with this, with options and stocks, like Gordon Gekko, but i'm not going to pay any corrupt yuppie, i don't apologize the insider information, but sadly ever have... And you can have good profits with this, My result was 20% in last week testing my theory, i have profits and losses, somebody have any idea to optimize my philosophy? Any tips to options, do you agree with my hypothesis?

QUIKTDR said...

After receiving a list of potential candidates what determines whether you enter and what are your entry parameters?

How do you handle market conditions with respect to entering possible candidates?

Semsons said...

the mental model that I'd love to have is just to be able to switch of tasks/concerns quickly. To get much more stuctured, not pursuing the instataneous concerns/obsessions.

I admire structured people that is able to work from 9pm to 18pm, later to go with their friends/familly etc. They do many thinks well during the day. I continously mix up all, when I should be working I'm surfing the web, when I should be resting at home I'm working, when I have to write up somehing any excuse is good to do it later, and so on. I guess is a problem of self-discipline.

Pradeep Bonde said...

Quiktdr
I have answered this earlier to your question on earnings post
--------------------------------
I look at the one with neglect. Whether it is first or second earnings acceleration.

A good earnings will lead to breakouts even in down market. Go back and see stocks which did well during bear markets. Many of them like GNSS, MTON (now INFO) had triple digit earnings.

hottpotato said...
This comment has been removed by the author.
Pradeep Bonde said...

Semsons
I found the post of below in my favorite site: gurufocus.com. Is it possible to anticipate earnings tracking the volume/price before the news is released?. Thanks.
--------------------------
Yes it is possible to do this on stocks with analyst earnings. There is an entire industry which does this .

hottpotato said...
This comment has been removed by the author.
hottpotato said...

yes i see...but we all have a choice to decide what or whom will be our master/masters...if not our own self, and also choice of new paradigms of thought...be like water... flow with stream/river eventually end up in ocean in the surf :)

Pradeep Bonde said...

Hotpotato

Tu yahan musafir hain,
yeh saraye paani hain,
char roz ki mehemaan, teri zindagaani hain.
zun, zameer, zar , zevar,
kuch na saath jaayegaa,
khaali haath aaya hain, khaali haath jaayegaa.
Jaan kar bhi anjaana,
ban raha hain deewane,
apni umr-paani par tan raha hain deewane.
Is kadrr tu khoya hain,
is jahaan ke mele mein,
tu khuda ko bhoola hain,
fakr-ke is jhamele mein.
aaj tak yeh dekha hain,
paaney-wala khota hain,
zindagi ko jo samjhaa,
zindagi pe rota hain.
mitnewaali duniya ka, aitbaar kartaa hain,
kya samajhke tu aakhir, is-sey pyar karta hain.

apni apni fikron mein,
jo bhi hain, woh uljhaa hain
jo bhi hain, woh uljhaa hain
zindagi haqeeqat mein kya hain, kaun samjha hain
kya hain, kaun samjha hain.

garytt said...

NGA is a good example of post earnings play. $8 to $12.60 in 5 tradng days. If you bought at the low the day after ($9.01) earnings were announced you would be up 40% today. This is what makes earnings season so much fun, although this one has been a little rocky for the small caps.

walter said...

hindi?

Amit said...

Garytt,

A couple of questions for you..

1. What earnings tracker do you use ?

2. How many days after earnings do you follow a stock for a move?

Amit

walter said...

zolt - earnings acceleration - released but didnt see it on any scan results

not fitting criteria

Pradeep Bonde said...

Walter
It is in Urdu language. Roughly translated it says:

You are just a guest here
This world is just an illusion
Your life is short
Money, ego, house, jwellery,
nothing you will take along with you
You came here empty handed, you will go empty handed
You know this , but you are acting ignorant,
and wasting your life
The way you are lost
in everyday life
you have forgotten about God
Many have understood this before
those who run after material thing loose
One who understand real meaning of life cries over fading sun. and wasted opportunities
Everyone is too busy with their own life
Who knows, what is really the meaning of life

----------------------------
The actual song is very long with lot of life philosophy in it.

walter said...

thanks for sharing!

m said...

Pradeep, do you have the entire song lyric in English? Thanks!

Pradeep Bonde said...

M
I can not find English translation of it. It is a very popular song in India.

I have the full lyrics in Urdu.
It is basically a advise to a proud young man about life.

Pradeep Bonde said...

M

The rough translation is in parentheses.

Hu ye naaamwarr be-nishaan kaise kaise ee
zameen kha gayee naujawaan kaise kaise

aaj jawaani par ithrane-waley kal pachtayega
aaj jawaani par ithrane-waley kal pachtayega
chadta suraj dheere dheere dhalta hain, dhal jayega
chadta suraj dheere dheere dhalta hain, dhal jayega
dhal jayegaa, dhal jayegaa
dhal jayegaa, dhal jayegaa
-----------------------------
(Hey you proud yuoung man, listen carefully
The rising sun will ultimately slowly set,
So don't be so proud)
---------------------------------
Tu yahan musafir hain,
yeh saraye paani hain,
char roz ki mehemaan, teri zindagaani hain.
zun, zameer, zar , zevar,
kuch na saath jaayegaa,
khaali haath aaya hain, khaali haath jaayegaa.
Jaan kar bhi anjaana,
ban raha hain deewane,
apni umr-paani par tan raha hain deewane.
Is kadrr tu khoya hain,
is jahaan ke mele mein,
tu khuda ko bhoola hain,
fakr-ke is jhamele mein.
aaj tak yeh dekha hain,
paaney-wala khota hain,
zindagi ko jo samjhaa,
zindagi pe rota hain.
mitnewaali duniya ka, aitbaar kartaa hain,
kya samajhke tu aakhir, is-sey pyar karta hain.

apni apni fikron mein,
jo bhi hain, woh uljhaa hain
jo bhi hain, woh uljhaa hain
zindagi haqeeqat mein kya hain, kaun samjha hain
kya hain, kaun samjha hain.
---------------------------
(You are just a guest here
This world is just an illusion
Your life is short
Money, ego, house, jewellery,
nothing you will take along with you
You came here empty handed, you will go empty handed
You know this , but you are acting ignorant,
and wasting your life
The way you are lost
in everyday life
you have forgotten about God
Many have understood this before
those who run after material thing loose
One who understand real meaning of life cries over fading sun. and wasted opportunities
Everyone is too busy with their own life
Who knows, what is really the meaning of life)
-------------------------

aaj samjhlee -eee
aaj samjhle, kal yeh mauka, haath na tere aayega,
woh gaflat ki neendh mein soney-waale, dhoka khayega,
chadta suraj dheere dheere dhalta hain, dhal jayega
chadta suraj dheere dheere dhalta hain, dhal jayega
dhal jayegaa, dhal jayegaa
dhal jayegaa, dhal jayegaa
-----------------------
( Seize todays opportunity today.
If you keep sleeping, the opportunity will vanish
The rising sun will ultimately slowly set )
--------------------------

Maut ne zamaane ko,
yeh samah dikha daala,
kaise kaise rustom ko khaak mein mila daala.
Yaad rakh sikander ke hosle toh aali thhey,
jab gayaa tha duniya se,
dono haath khaali thhey.
ab na woh halaku hain,
aur na uske saathi hain,
jung, julus, porus hain,
aur na uske haathi hain.
kal jo tann ke chalte thhey,
apni shaano-shaukat parr,
shamma tak nahin jalti,
aaj unke durbath parr.
----------------------------
(Death has taught lessons to even the great ones
Alexander the great came with lot of ambition,
but in the end , he left alone
Those who are very proud of their
achievements and wealth
at the end find nothing is left behind
no one lights a candle for them)
------------------------------

adna ho ya aala ho, sabko laut jaana hain
sabko laut jaana hain, sabko laut jaana hain.
Muflison tawanjan ka, kabr hi thikaana hain,
Kabr hi thikaana hain, kabr hi thikaana hain.
Jaisi karni......e eeeeeee
Jaisi karni waisi bharni,
aaj kiya kal payega,
sar ko uthakar chalne waale, ek din thokar khayegaa.
chadta suraj dheere dheere dhalta hain, dhal jayega
chadta suraj dheere dheere dhalta hain, dhal jayega
dhal jayegaa, dhal jayegaa
dhal jayegaa, dhal jayegaa
----------------------------
( Whether you are rich or poor
your ultimate destination is the grave
As you sow you reap
If you walk arrogantly
One day you will fall down
The rising sun will ultimately slowly set,
So don't be so proud)
----------------------

Maut sabko aani hain,
kaun iss-se chhoota hain,
tu fanah nahin hoga,
yeh khayal jhoota hain.
saans toot-te hi sab,
rishte toot jayenge,
baap, maa, behen, biwi, bacchhe chhoot jayenge.
----------------------------
(Everyone is going to die
You are not going to be exception
As soon as you die all relations you have with your father, mother, sister, wife, kids will end
and you will have more surprise)
-------------------------
tere jitne hain bhai,
waqt ka chalan denge,
chheen kar teri daulat
do hi gaz kafan denge,
-----------------------------
( as soon as you are dead
they will all fight over your wealth)
--------------------
inko apna kehta hain,
kab yeh tere saathi hain,
kabr hain teri manzil,
aur yeh baraati hain.
laa-key kabr mein tujhko, qurqabat daalenge,
apne haathon se tere mu pe khaak daalenge.
----------------------------
(Those whom you believe are truly yours
You never no know what they can do
One day they will throw flowers in your marriage procession
Same people for their greed kill you
and throw soil on your grave)
------------------------------------
Teri saari ulfat ko,
khaak mein mila denge,
teri chahnewaale, kal tujhe bhoola denge.
---------------------------
( All your achievements will be forgotten
Your near and dear ones will ultimately forget you)
------------------------
Is liye yeh kehta hu,
khoob soch le dil mein,
kyon fasaye baitha hain,
jaan apni mushkil mein.
---------------------------
( That is why my advise to you is
Think hard
Don't waste your life
Seize opportunities
Go with the flow)
----------------------------
Kar gunaah se tauba, aake bus sambhal jaaye,
aake bas sambhal jaaye, aake bus sambhal jaaye.
Dum ka kya bharosa hain, jaane kab nikal jaaye,
jaane kab nikal jaaye,jaane kab nikal jaaye,
( Seize the current opportunity
There are no guarantees in life
Just go with the flow)

Mutthi bandh ke aane-waleyyyyyyyyyyyy
Mutthi bandh ke aane wale, haath pasaare jayega,
dham, daulat, jagir se tu ne,
kya paaya, kya paayegaa,
---------------------------
( You will not gain anything
by running after materialistic things)
----------------------------
chadta suraj dheere dheere dhalta hain, dhal jayega
chadta suraj dheere dheere dhalta hain, dhal jayega
dhal jayegaa, dhal jayegaa
dhal jayegaa, dhal jayegaa

(Hey you proud yuoung man, listen carefully
The rising sun will ultimately slowly set,
So don't be so proud)
==============================================

walter said...

pradeep,

in my line of work, i find metamodels and conceptual frameworks very valuable. when you represent them visually, they become a tool for consensus building and they provide a language for talking about complex ideas, entities, and relationships. their development often presents the challenges of identifying and articulating a basic and fundamental logic (ontology). and when they are well designed and vetted, they can simplify things buy guiding users. obviously they need not be "closed" systems. metamodels should serve as "experimental tools" - if you tweak one aspect/entity of the model in one place, how does that tweak manifest itself throughout the rest of the model? in this sense, a robust framework worth anything should accommodate and foster creative thought and thinking about things in new ways. that being said, how do you develop a mental model of trading that is "open" and "accommodative"? that is self-reflexive and that allows for tweaks that is completely consistent and "allowable" by how things are structured...? is it just a matter of maintaining and open mind? being a sponge?

Pradeep Bonde said...

Walter
I know system designers and especially interface designers use lot of mental modeling things.
Same way in advertising we used to create an entire model of how a consumer for example buys a detergent.It will be complete diagrammatic or conceptual model of what do they think, feel, do when deciding to buy detergent. What are their beliefs, assumptions, actions. What is the sequence of event. How do those beliefs result in choice and so on.

Now this was not just a theoretical model, it was live model, with constant market research, actual user observation and whetting.In fact companies like P&G and Unilever have spent years perfecting the understanding of how consumers mental models work. That is the secret of their success.
So once the model was in place it is easy to manipulate it. We will change message and take it to a focus group and you would immediately see change in peoples reaction. Or we used to do simulated shopping games, where consumers are exposed to a new argument about product for say one hour and then they are asked to shop, their behavior would change.

On a more microscopic level if we similarly map our mental model for say stock selection, we can find out what are our beliefs, assumptions, processes, steps etc.So one can then change.

Most of the change at personal behavior level also requires our earlier hard coded arguments to be changed with new augments. If we become receptive to new arguments, then contemplate over them, then internalize them, then a new assumption, new belief takes hold and as a result behavior changes.
Now all this can happen in minutes. We are not many times aware of this process. By being aware we know how to change it.
This entire thing goes in to the paradigm change kind of logic.
Self awareness, new arguments, contemplation, internalization, conscious focus, that way the model changes.

m said...

Pradeep,

Thanks for the lyrics.

hottpotato said...

i stand humbled-or humiliated i do not know which? i know iam a sojourner here,money is nothing but a tool,love is absolute! everything else will pass away!-i do believe-i am young and unwise sometimes-but i am willing,willing to change.i do love and try not to covet or envy what i do not deserve,i am human and i error much but i love intensely which covers a multitude of wrongs-i am willing,willing to learn to be okay with life learning to be okay with death.
namaste T

hottpotato said...

also learning the hard way to trade

Manny said...

P:

You said - On a more microscopic level if we similarly map our mental model for say stock selection, we can find out what are our beliefs, assumptions, processes, steps etc.So one can then change.
--------------------------------

Do you have any recommended readings or sites that describe this process?

Pradeep Bonde said...

Manny
There are couple of books on mind mapping. I think Tony Buzan is the author.
I used to use some of the things from a Japanese book, which was about productivity planning, if I remember correctly the author was Isao Shinohara