The Pained Trader: cognitive bias

The Pained Trader considers a better path to prediction.

  • By The Pained Trader
  • 03 Jan 2019
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It’s the January sales and everything must go. Does that include me? Every man has his price and as befits this time of year, I’m heavily discounted. Benjamin Franklin’s resolution at the outset of each year was to wage war against his vices, sue for peace with his neighbours and to find himself a better man. I’m scoring none out of three thus far.

In fact, I appear to have the first two propositions the wrong way round and as regards the third, well, I can safely disregard the double entendre because I don’t have a man in my life at present and I can’t say there’s any evidence to suggest The Pained Trader, 2019 version, shows any marked improvement on last year’s model.

Welcome to the New Year. Come on in, the water’s polluted.

For this, the first (you’ll have to ask the editor if it’s the last) column of 2019, I’m torn between looking back at the 12 months past, holding a post-mortem on what went wrong or nervously looking forward to the coming year and what could go wrong.

Usually, on the final page of my new and pristine diary, I make a few tentative forecasts for the S&P, for US long-bond yields, the oil and gold prices and make a best buy recommendation with accompanying best short idea. Each year, I fantasise that come December I can consult my predictions and congratulate myself on my far-sightedness and business acumen. It goes without saying, that final page of my diary never sees the light of day and not once have I been able to show off my soothsaying qualities to anyone because they are unerringly inexact.

That I’m somewhat less than fatidic is not news to punters or my client base. Unfailingly fallacious this also explains why I’m still broking like Sisyphus thirty years after I started but why is this so? They may chew a lot of stones first but even blind squirrels find the odd acorn occasionally. True, if it weren’t for bad luck I’d have no luck at all, but there must be some kind of cognitive bias which makes my default position just wrong.

I consulted a list of cognitive biases but rather than finding one straightforward explanation, a single neural pathway leading me astray down which I’m always dragged, I seem to be suffering from all of them, even those in direct apposition. I knew as soon as I started scrolling down what was in essence, a litany of mental ailments, it was a mistake, akin to feeling discomfort somewhere new and obscure then typing the symptoms into a search engine and discovering from the first link that you have contracted a terminally degenerative disease.

I realised, with mounting horror, I am afflicted, inter alia, by the hot-hand fallacy, irrational escalation, Parkinson’s Law of triviality, the availability heuristic, the backfire effect, declinism, neglect of probability, a courtesy bias and post-purchase rationalisation. I was shocked to discover there is even a psychological term for the undue weight I attach to the messages I regularly receive from the spirit world advising me of market direction: pareidolia. My case is chronic. And untreatable.

Harking back to what were on the face of it, more primitive societies, mankind resorted to some extremely random methods of divining the likely direction of asset prices for slaves, fish paste, goats and what other trinkets they prized.

Without Goldman Sachs analysts or algorithmic models or black box trading systems they resorted to far more reliable and rational methods from which to take their guidance. For example, they sifted through the entrails of animals (haruspication) or examined their excreta (scatomancy) or pored over what remained of a donkey’s head after boiling it (cephalomancy) or the myriad other processes. Their capacity for self-delusion was, like mine, seemingly limitless and torrentially imaginative.

Now I know there would be health and safety issues, our air conditioning systems can scarcely cope with a London summer let alone vats of boiling faeces bubbling away at the end of the desk and HR may disapprove of donkeys in the dealing room (they don’t seem to mind them trading, though) but I wonder if it were permissible to revive these ancient techniques? And, if we did, whether they may prove no less ridiculous or unsuccessful than the three quarters of the fund management industry which underperforms the index or bulge bracket equity strategists and bond market gurus or the legions of chartists with their bendy rulers.

I open the desk diary then on the final page and with a lapidary flourish, make my bets for a couple of benchmark indices, Brent futures, the barbarous relic, one long recommendation and one short call. No rationale here, just a hunch, like usual. Anyway, I doubt I will be here to find out exactly how wide of the mark these are compared to most years.

I’ll settle for wrong — but within normal parameters. There is something I want with every fibre of my being and all the passion I can muster but it’s not merely the imperious — and unprecedented — position of being right.

Before I sat down to write this piece, I reminded myself of my New Year’s resolution: to write without sliding inexorably into melancholy or bitterness, if only every now and then. I don’t think I made it out of the first paragraph. I wish you, Gentle Reader, the very best of British luck for 2019 and failing that, simply that you are spared mine.

Mistle-toerag and wine

I hope no one’s holidays were ruined by worrying about whatever happened to the two bottles of wine which in the run-up to Christmas were stolen from The Pained Trader by a light-fingered delivery man who turned out to be a robbery man. When confronted with the reality that his misappropriation of my beloved Brunello and deluxe d'Yquem had been spotted, the culprit sang like a canary and handed back his ill-gotten grape juice with what sounds like alacrity. Re-delivery was arranged although I was at pains to stress that a different driver was preferable. A bottle of pink champagne thrown in as a goodwill gesture and now my wines are back, nestling on my cellar's shelves until I decide to share them with someone worthy of the largesse again. Was it churlish to ask how the wine had been stored in in the interim? "At a steady 13-15 degrees, I hope?"

Is this a Christmassy, feel-good story? Well, for me it is, I suppose, the restitution of an indulgence for which I paid good money but scarcely merit. What about the van man? It's the end of the road for him and his Ford Getaway, I suspect, and while I came home to lovingly cuddle my Sauternes, he would have returned to a grim, unheated roomlet in one of London's god-forsaken postcodes and broken the news to his sprawling family that he'd been sacked for gross misconduct, just in time for Christmas. In Dickensian scenes of poverty and distress, the starving offspring wailed and his wife, heavy with child, wept silently beside a plastic tree, bereft of gifts. (This has happened to me — twice — so the mise-en-scène requires little imaginative legwork.) That's the real meaning of Christmas: it's a zero-sum game.

  • By The Pained Trader
  • 03 Jan 2019

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 JPMorgan 132,387.73 545 8.30%
2 Citi 123,981.47 487 7.78%
3 Bank of America Merrill Lynch 105,093.26 413 6.59%
4 Barclays 99,545.40 383 6.24%
5 HSBC 81,053.20 424 5.08%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Bank of America Merrill Lynch 11,525.35 30 7.25%
2 BNP Paribas 8,422.96 46 5.30%
3 UniCredit 8,389.55 43 5.28%
4 Deutsche Bank 8,298.69 30 5.22%
5 Commerzbank Group 7,837.68 40 4.93%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Morgan Stanley 4,425.28 19 11.23%
2 Goldman Sachs 4,006.06 15 10.16%
3 Citi 3,527.84 22 8.95%
4 JPMorgan 2,809.08 19 7.13%
5 UBS 2,241.39 12 5.69%