Behavioral finance FAQ / Glossary (Magical / Mystique)

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Dates of related message(s) in the
Behavioral-Finance group (*):
Year/month, d: developed / discussed,
i: incidental

Magical thinking, number





00/11i,12i - 01/2i - 03/03,11i,12i
- 04/3i - 07/6i + see attribution,

belief, illusion of control, mystique,
numerology, numeracy bias, round
number,wishful thinking, mysticism,
overconfidence, optimism, hope
+ bfdef2

Waiting for planets and stars to show the way...
...can leave us stranded in outer space.

Definition: Magical   thinking comprises all reasonings that are based on:

In the broad sense, irrational hunches and
   intuitions


More precisely, a belief without real evidence
   that some
random results are correlated

to some (unrelated) behaviors, rituals, thinking,
events
(seeing a black cat...).


Or the optimist tenet that we can put the sky and
  universal
forces
on our side.

Magical thinking and decision making:
     practical dangers

Seeing things in fantasy land can blind you.


It is not always bad

Magical thinking, taken as a gentle dream or mild superstition
can be a pleasant, reassuring and innocuous pastime.

More important, optimism is even good for the health!

Anecdotically, attributing specific mental powers to somebody, or
believing in eerie relations between events...helps write TV scripts.

But in some area it can seriously and harmfully mislead

It raises a serious problem when applied
to important decision making matters.

This danger has been for example extensively studied when
economic and financial
decisions are at stake .

Practically it submits the decision to various biases:

On the cognitive side:

 On the emotional side:

Simplistic cause-effect illusions

For example taking  

coincidences as signals
from the sky,

Far-fetched or even magical
   explanations
, attributions

   , stories:
c
onspiracy theories, urban
legends...

Generally, preset
   beliefs about future
events.

Over optimism or
   overconfidence

(see related glossary
articles),

Sometimes  fear .

The "hope and fear"
cocktail can bring
superstition
, a
common type of
magical
thinking that
submits decisions to
futile rituals.

It can also make fancy
that some external
power / conspiration
acts against us 

Collective vs. individual magical thinking

Magic wand.

Magical thinking can be collective , as is found in many cultures
and populations
, however enlightened they are.

On the individual level, if we detail the definition a bit more,
magical thinking is someone's belief that:

Either he/she can mentally influence destiny ...including 
    the future price of a stock it owns,

Or there are signs in the sky ...or at ground level
    (coincidences...) that show him/her the way,

Or, alternatively, he/she is doomed by destiny, unless
    he/she take (magical) countermeasures.

It leads in some cases to esoteric approaches (see "mystique" in the
article below).

From magical thinking
     to magical economics and finance

Magical accounts and Harry Potter's economics


Not only magical thinking is a common bias in many life circumstances, but
also, however surprising it might seem, it is often seen in money-
related reasoning, expectations and decisions
(here again
see "mystique" in the article below), human activities supposed to be at
the apex of rationality.

Examples:

Some pundits have talked about "voodoo economics" to qualify some
simplistic beliefs
supposed to help run the economy better,

One of those common fairy tales is that pouring more and more
money always boosts growth.

Some financial bubbles (like the dotcom bubble, the subprime
   crisis) can be
related to a near-religion of limitless possibilities and eternal
   and
relentless growth.

Now, some metaphysics:

Do the abstract traits of money contribute to its magical /
supernatural image?

But it existed also when money was not invisible ethereal electronics,
nor sanctified paper with pictures and figures, but was mostly under
the form of rare scintillating metals.

It seems that the specific properties of such "hard" money made it
seen magical and transcendental also.

What causes magical thinking?

Just flawed logic?
Or denial or fear of uncertainty?
Or plain pride?

Magical thinking can be linked to:

Either purely

   cognitive
   factors
.

Mostly, in
economics and
finance,
confusions when
using data.

 

 

 








 



 

 

 

 

In investment matters, a concrete example,
the typical data at play are numbers

Numbers are usually relevant information,
but often also a simplification, even a
caricature of reality.

A belief in the near sanctity of

numbers and
number crunching gives the
illusion of a scientific approach.

That veneration for metrics (and/or their
manipulation) might bring data misuses
such as:

Generally, relying too much on seemingly

precise statistics or on mathematical
models'
outputs,

See numeracy bias, range estimate
aversion
.

Taking coincidences / clusters as
   correlations,
or correlations as

cause-effect phenomena.

pi-arrig.gif (1666 octets) Anchoring on - easy to spot and to
   memorize - 
magic numbers (round, or
  symbolic ones, as in numerology).,

Or
temporary
or
durable
emotional
factors
.

A crucial one is
   the need to
   believe
.

 




Or at least the need to find answers /
explanations
to what seems mysterious.

This "wishful thinking" can be a risky)
antidote
to  the anguish
or at least
discomfort
caused by the

."uncertainty aversion"

Such emotions tend to be more acute in
extreme periods characterized by:

Either mental stress,

Or on the contrary overconfidence and
  
"feeling good".

Or habits

   and rituals

 



Beyond cognition and emotion, magical
thinking can  lead after a while to
near-
automatic

repetitive practices
.

Or pure
   narcissism

An extreme
self-admiration
 




Narcissism (see that word) is the
apex of  
magical thinking strongly
peppered with extreme self-admiration

This results in blind overconfidence and
illusions
of knowledge and of competence
(see those phrases).

 

Dates of related message(s) in the
Behavioral-Finance group
(*):

Year/month, d: developed / discussed,
i: incidental

Mysticism, mystical, mystique


01/8i -02/8i - 05/5i, 10i
+ see magical thinking, fad,
superstition

When some people confuse stock trading
and communion with the Universe.

People have a liking for mysticism or the esoteric, a communion
feeling with the gods or universal forces.

Without getting into the debate about the objective existence of such
forces, this human attraction might be explained by various reasons,
motives or "needs".

Some motivations are quite respectful, others are more dubious.

Also, some are quite personal, others more collective or even manipulated.


Origins

Here are examples of unconscious or conscious causes or purposes
that seem often to drive those beliefs and the related behaviors:

Some occasional phenomena

A string of good luck or bad luck , making 

people feel they have a "hot hand" or the "bad eye".

The idea that some transient coincidences and  
    clusters of events / data are sky-given signs about the
    future

.

The occasional feeling of safety that mimicry with

other believers gives in some circumstances.


Or some deeper mental traits

A mental way by people to evade, or complement, their life

in what they see as a too rational / materialistic world.

This is a perfectly respectable personal motive, as said above,
as long 
as there is no attempt at forcing it onto other people

A higher explanation (rationalization, attribution) for them
    of good and
bad events.

This provides a buoy of certainty and hope in a world that is
uncertain or is deemed frightening.

The widespread emotional "need to believe", just for
    comfort
(a thing open to manipulations by gurus, tricksters
     or ideologues),

Or at least the need to find an answer to life puzzles, or to
avoid the pain  of uncertainty.

Good old "hope and fear" for which mystique can find
   
some ethereal hidden form.

Magic / mystique in financial markets

From magic computing to market hocus pocus

Struck by an unworldly financial piety, some individual asset traders, but
also professional money managers, think they have found Grail-like
formulas
that will make them sure winners.

Those miraculous money making tools are:

1) Either overly sophisticated mathematical 
    methods
(see quants, system trading, numeracy, model...).

However useful they might be in ordinary periods, they face problems and
disillusions, like any heuristic, when situations change.

Those methods, although they might be relevant in some situations,
migjt be 
flawed  by:

Transient hypotheses / assumptions,


Deified probability laws and stochastic equations that do not
  
necessarily apply to all situations,

Not too reliable or obsolete historical statistical series,
  
whatever the usefulness of statistics,


Some blindness to more "narrative" / less quantifiable realities
   or to
"weak signal" or "hidden factors" not taken into account by
    the equations.

Those down to earth realities that a model cannot see are proper
to our changing world in which basic uncertainty can trap
back into the genie lamp what was thought as measurable risks
and mathematical wonders.


2) Or even esoteric techniques (elaborate and

scientific-looking superstitions) that seem to respond to
those emotional needs.
The most common quack recipes rest on:

Pseudo-mechanical / cyclical / rhythmical effects.

For example, "socionomics", a one-sided theory, sees a self-
generated (or god-given?) machinery of social mood vibration
as the great "universal" clock that commands events.

This is seeig things as automatic to such an extent that down-to-
earth events did not take part in social mood formation.


Numerology, faith in round or "lucky" numbers or series of
   numbers:

We find here Elliott waves, Gann numbers, the Fibonacci's
"golden" ratio (
1.618) , and other numerological methods...


Astrological / cosmological approaches,

Some of them are embedded in or mixed with the mechanical
and numerological ones.

No comment!

Those approaches, either too rational (as in 1), or plainly irrational (as in 2),

can contaminate a bulk of investors.

They generate some fads that lead to biased / irrational decisions.

If the financial weight of those players becomes important enough, this could
cause price anomalies.

Also, some types of investment, gold for example, have their own
mystique.

It is difficult to find what and how fundamental economic criteria
(jewelry uses and other industry demand, mining production,
monetary threats....) can be used to estimate gold "intrinsic value".

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