Mental models and wrong path

How much time does it take for you to realize you are on wrong track. Now supposing you were one of the perpetually bearish participant in the " prominent blogger" sentiment poll, at some stage in one year, you should have realized that week after week, I am wrong in predicting market direction. If you were interested in profiting from market or genuinely interested in improving your forecasting ability, you would have done something different, changed your models, methods or assumptions. But that seldom happens.

What happens instead is externalization of problem. You blame others for being irrational, you invent conspiracy theories,you blame poll methodology, you blame Fed Chief. You in essence wish for alternative reality. That alternative reality is hard wired in to your mental model.

Mental models are deeply held mental images, beliefs, and assumptions. The mental models play a very important role in dealing with world around us. We interpret the world according to our mental models. Two people with different mental models react and interpret same data and same situations differently. Mental models include what a person thinks is true but not necessarily what is actually true.

That is really the key, because mental models are not necessarily based on true knowledge but assumptions and belief, a cycle of behavior continues till the mental model changes. That is why you will find in all walks of life people who have a particular mental model continue to behave in a particular manner for entire life time. Few people are conscious of their own mental model.

Supposing your mental model is hard wired to thinking all govt data is manipulated, or your mental model holds erroneous assumptions about how inflation should be measured, unless that mental model changes, you will continue to behave in that manner.

Lot of TV pundits pout economic theories and conspiracy theories, which are not based on economics as it is practiced as science or proven by statistics. In fact many of the pundits will not pass basic course in economics in any respectable University, if they advocate such pseudo intellectual stuff. But in mass media and especially on TV, content is not important, but delivery and entertainment is.

Mental models become even more critical, if you are not a leader and just a follower. Followers derive their mental models from leaders. In most cases followers by their very own nature lack the critical ability to form their own views, that is why they follow others, so unless they abandon the original leader, they continue to have wrong mental models. Followers have even more difficult mountain to climb when it comes to changing mental models.

Successful people in most walks of life have different mental models than mediocre people. You will also notice conspiracy theories are very common amongst under achievers and mediocre people. Such peoples mental model is hard wired to externalize problem. By externalizing the problem, it helps them avoid taking the first step to correcting the problem. Most successful people are very quick to realize when they are wrong and change their mental models.


Unknown said...

Well, what about your mental model? Perhaps you should change the model that lead you to believe the current correction is "garden variety"--it truly isn't. Just a thought.

Pradeep Bonde said...

As of now the actual market behavior is in line with that statement. I have clearly stated if I see a 200 plus down day in next 2 weeks, that assumption will be wrong.

Unknown said...

I disagree. With a move like that on the VIX the day after you posted "garden variety", I don't think you can qualify this as such.

A 200+ down day wouldn't be calling it anymore, you would just be labeling the obvious. That would be retrospective not anticipating market action.

walter said...

pradeep, what do you make of big moves up/breakouts accompanied by big volume but lacking any obvious catalyst like a news release, etc.

is it still an episodic pivot?

i ask in reference to ZOLT today


nodoodahs said...

"Now supposing you were one of the participant in the 'prominent blogger' sentiment poll, at some stage in one year, you should have realized that week after week, I am wrong in predicting market direction."

Insert the words "perpetually bearish" between "the" and "participant" and I'll go along 100%. I am fairly certain there are some participants of that poll that you respect, and that you know are not in that permanently bearish crowd. It takes very little additional effort to add clarity of thought to the paragraph and address the point you make specifically to them, and not to the rest of the poll members.

I've made a very similar point to yours when I wrote about John Hussman to the effect that I wasn't the sharpest tool in the shed, but if my model had missed a four-year bull market, I would be shopping for a new model. For that, I was labeled as "arrogant" and about half the time I try to post comments at some popular bear blogs, I get "not authorized" error messages.

Personally, I think it often takes a "bottom" to make a man rethink his mental models.

Pradeep Bonde said...

Done. I don't think the problem is with the bullish bloggers or bearish bloggers, the problem is with methods.

Zolt is not EP today.
IAX or AIRT are EP today, they had earnings as catalyst.
See your mail box or more details.!!!

nodoodahs said...


I agree 100% it's a question of methods, and examining them for whether they work, are they still working, applying judgment, and being flexible to change with it's proven not to work.

The reason why the Blogger poll shows up so well as a failure of mental models is precisely because of the perma-bears. Now if this were a bear market and the poll was perpetually bullish, we'd just flip a few words around and make the same case. It's obvious that the perma-bears aren't following a good method, aren't examining their methods, and aren't flexible to change, or else they would have been voting bullish more often then not, over the course of the past year of the poll.

Hey, how about that AIRT!

Anonymous said...

How does the so called automated software trading (which already accounts for 30% of the market volume) influence your earning's method of trading?

Pradeep Bonde said...

Does not matter, those computers are looking for short term trades. Earnings trade work for weeks to months.

Editor said...

Pradeep I absolutely love your blog. It's clear that you are so well informed and well read. I absolutely love hearing the combination of mental models and tremendous stock strategies. You have given me a great perspective on things. It's great to hear about all the books you read, and all the ideas you have, and you still have time to blog daily. As me being someone who has been facinated with how the brain works, NLP and modeling; as well as a stock trader and investor, I don't think I could find a better blog. I read your post everyday.

Great stuff keep it up!

Pradeep Bonde said...