Why do most people make less and lose more in the market? (superior)

Trading is a game among investors, and those who outperform the market for a long time will always be a minority.

Behavioral finance is an interdisciplinary subject of psychology and finance. The research results of behavioral finance tell us that human beings are far from rational in terms of investment decision-making mechanism, but generally have various psychological biases. Investors who can understand, manage, and even exploit psychological biases will have a great advantage in the market game.

This article (divided into two parts) introduces several psychological biases that have the greatest impact on cryptocurrency investment decisions, analyzes their evolutionary sources, negative impact on investment decisions, and feasible management methods, and discusses how to make rational investment decisions in line with own heart.

1. The Human Nature of Investment

Even after learning effective investment methods, such as fundamental analysis, valuation and timing methods of value investing, most people still earn less and lose much more in market operations.

The fundamental reason is that successful investment concepts are anti-human, so successful investors must first understand human nature. To illustrate this point, we must first discuss what human nature is. In fact, understanding human nature does not require profound philosophy.

Starting from your daily life, what things are you voluntarily, willing to do or even willing to overcome obstacles to do? What things can only be done by external pressure or inner struggle? Why do we naturally like to do some things and not others?

Man is an animal. There is a common misconception that human behavior is the result of rational thinking, while other creatures simply seek advantages and avoid disadvantages, which is far from the case. Human behavior is not that rational, and the behavior of other animals is not simple.

For example, everyone knows that bees can sting people, and because the stingers of bees have barbs, if they pierce peoples skin and then pull them out, some internal organs will be brought out, and the bees will not survive.

I was stung by bees when I was a child. At that time, I was naughty. There was a beehive in a crack in the wall. My friends and I blocked the beehive with mud to prevent the bees from coming out. As a result, the mud suddenly fell, and the bees swarmed out. He ran away with his head in his arms, but was still stung.

Think about it, everyone, every bee can resist the invaders desperately without the education of patriotism or love of home. How can this be done?

We now know that the behavior patterns of organisms are shaped by natural evolution, known as evolutionarily stable strategies. The strategy of stinging is related to the strategy of honey bee storage.

If an animal evolves a strategy to store food but does not have a protective strategy to cooperate, it will be a dowry for others and will be at a very disadvantageous position in the competition for survival. What we call human nature is actually the evolutionary stability strategy of human beings.

Human behavior is governed by both humanity (or evolutionarily stable strategies) and rationality.

Humanity and reason sometimes coincide and sometimes conflict. The evolutionary stability strategy works through the endocrine system in higher animals. We dont know the specific mechanism of action, but it can only be conceptually summarized as reward center and punishment center.

The reward center is responsible for producing various pleasures, and the punishment center is responsible for producing negative emotions such as pain, fatigue, tension, anger, frustration, jealousy, pain, and regret. Modern society is materially rich, but more and more people have psychological problems such as depression.

The root cause is that modern ways of living and working do not provide the appropriate psychological rewards for us great apes who wear suits and ties. For a hunter who is accustomed to stalking prey on the grasslands, living a nine-to-five life, sitting in a cubicle every day, thinking hard in front of a computer screen, it is strange that there are no problems.

The core reason for the increasing number of psychological problems in modern people is the continuous conflict between the living environment and the evolutionary stability strategy, which leads to the imbalance of the reward center and the punishment center.

It is very difficult to confront human nature with reason. Typical examples include losing weight, quitting gambling, and quitting drugs. There is also studying hard and working hard without distraction. Although everyone knows that it is beneficial to themselves, only a very small number of people can persist for a long time.

Why is it difficult to lose weight? Because in the past hundreds of thousands of years, food shortages have been the greatest threat to mankind. Arguably the most prominent evolutionary stabilization strategies of humans revolve around combating food scarcity.

For example, hunger is unbearable, especially for children who are screaming with hunger. Even if adults go out to face wolves, tigers and leopards, they must find ways to bring food back. The response to hunger is the greatest motivation for human survival.

In addition, when hungry, the human body will automatically reduce energy consumption, and the energy consumption of the same action is reduced by 20%. Losing weight is about confronting evolution with a powerful psychological and physiological mechanism, and the difficulty can be imagined.

But think about it, do you know anyone who has lost weight successfully? There are still some. I know a few people who have successfully lost weight, all through exercise, except for one who played badminton, and the others all through long-distance running.

Long-distance running is a magical sport. Most people dont like long-distance running. After running a few hundred meters, they will sweat profusely, feel flustered and short of breath. But some people are addicted to long-distance running, and they feel uncomfortable if they dont run for a few days. Now there are hundreds of marathon events all over the country every year, and the venues for large-scale events are full.

For example, in the Beijing International Marathon every October, I have participated in a half-marathon before. Now the 30,000 entries are all full marathons, and lottery is required to qualify for the competition. Why do humans love and hate long-distance running?

First of all, running quickly consumes energy. First, the punishment center will respond, telling you with fatigue to stop running and save energy. But running for a long time is the main way of human hunting, and it is a behavior that is beneficial to human survival. Therefore, persistent running for a long time will stimulate the reward center and obtain a sense of pleasure.

This is the evolutionary stability strategy that encourages us to persevere and bring the prey home. So once the reward mechanism of running is triggered, it is no longer difficult to fight fatigue, and running becomes a habit, or even an addiction, then weight loss is a matter of course.

The psychological mechanism that leads to failed investments is rooted in human nature: reckless advancement, avoiding mistakes, greed and fear, and following the crowd are all psychological characteristics formed by human beings in the long-term evolution.

In hunter-gatherer societies, these mechanisms help humans adapt to the harsh living environment and achieve a balance between risks and benefits. However, the capital market is very different from the hunter-gatherer society, and these evolutionary stability strategies have become obstacles for investors to reduce risks and increase returns.

So how can investors counter these psychological mechanisms that negatively affect investing? Thats what were going to discuss in this article.

In a survey of randomly selected adult men, they were asked to rate their ability to get along with others. The result is that 100% of the respondents believe that their ability to get along with others is above the average.

Of course, if you think about it, this is impossible. Everyone is in the top 50%, who is the bottom 50%? Similar surveys have been repeated countless times with different themes for different groups of people.

Whether its college graduates predicting their future income, entrepreneurs estimating the survival time of their businesses, men evaluating their athletic ability, driving skills or sexual ability, womens evaluation of their appearance.

All surveys come to the same conclusion, that is, people are overly optimistic about their abilities and future estimates. At the same time, peoples assessments of others are much more objective.

For example, according to the survey, college students are overly optimistic about their future income, the possibility of divorce, and the possibility of becoming an alcoholic. However, if college students are asked to evaluate their roommates, the survey results are very close to the actual social statistics.

Overconfidence is a remarkable psychological characteristic of human beings. All humans in the world today belong to the same subspecies of hominids—homo sapiens. That is to say, from the perspective of the evolutionary tree, human beings all over the world are extremely similar, with little genetic difference.

Homo sapiens originated in East Africa about 300,000 years ago, over a period of hundreds of thousands of years. Homo sapiens are distributed in groups of dozens in the grasslands and mountains of East Africa. Although they can make simple stone tools and use fire, the life of this hairless great ape is no different from that of other social animals. It is difficult to see that they The potential to become the spirit of all things in the future.

About 100,000 years ago, Homo sapiens began to leave Africa and started a global migration path. Now we can roughly draw a map of the migration route of Homo sapiens and the time point when they arrived around the world based on archaeological evidence from all over the world and the study of the genetic map of local people.

Lets look at the big picture on the upper right. Homo sapiens reached the Near East about 60,000 years ago, South Asia 50,000 years ago, and Europe, East Asia and Australia 30,000 to 40,000 years ago.

15,000 years ago, it passed through Siberia, the Aleutians, and the Bering Strait to Alaska, and continued to migrate south along the American continent. It took only 3,000 years to reach the southernmost tip of South America.

Finally, Homo sapiens in Southeast Asia continued to spread along the Polynesian islands and spread to the Pacific islands in the last three thousand years of human history.

Why do humans keep migrating? Of course, there are reasons for environmental changes and survival pressure. However, where early Homo sapiens walked, the upper limit of population density was generally not reached.

From ancient times to the present, human beings have longed for the Promised Land, and it seems that there is always a voice echoing in their hearts: beyond the mountains and beyond the sea, there is a piece of fertile soil waiting for you. So overconfidence can also be seen as an evolutionary selection bias.

If the ability of Homo sapiens is not enough to adapt to the complex and changeable environment, it will be eliminated if it leaves the original habitat. So after a long period of selection, Homo sapiens should still live in East Africa, and it is a very conservative animal.

Surveys show that, on average, men are more overconfident than women. Especially in the investment market, most investors believe that they can beat the market. This is not surprising at all. In a zero-sum game market, any rational investor who believes that he cannot exceed the average return should choose to exit.

Or lets put it another way, if every investor in the market has an objective evaluation of his investment ability, then investors whose ability is in the lower half should leave the market.

Among the remaining people, those who are not superior in ability should also stand. So many times, in the end, only the most capable investor has reason to stay in the market, but he has no counterparty.

Every transaction in the market represents the transaction price. The seller thinks the price is overestimated, while the buyer artificially underestimates the price. Without the confidence of both buyers and sellers in their own conclusions, the transaction will not happen. So if there is no overconfidence, there will be no capital market in the world.

Strictly speaking, overconfidence is a phenomenon. The psychological mechanism that causes peoples overconfidence is mainly confirmation bias.

Confirmation bias, also known as confirmation bias or verification bias, means that when people already have a certain view or point of view subjectively, people tend to seek or directly accept information that can support the original view, while ignoring information that may overturn the original view. There is evidence for opinion.

So why do humans have confirmation bias? In fact, a large part of human psychological mechanism is to simplify decision-making, even if the basis for decision-making is not sufficient.

Many psychological experiments tell us that many irrelevant factors profoundly affect human decision-making. Simply put, human decision-making process is very unreliable. But evolutionarily speaking, quick and firm decisions are usually better than indecision.

Everyone knows that there is the famous Buridans donkey in the history of philosophy. There are piles of grass on the left and right sides of the donkey, and they are at a considerable distance from it. The donkey, being perfectly rational, couldnt find a reason for which pile of hay to eat first, so he starved to death.

Human beings live in an environment full of accidents and unknowns, making decisions every moment. There are many roads in front of the hunter, which one should he follow to chase the prey? It is much better to quickly make a decision with a certain correct rate, and to execute it with confidence, than to hesitate.

In all human organization, the skeptic is the most useless and the lowest. The top tier is occupied by a self-confident and persuasive elite. Although the correct rate of elite decision-making is not necessarily better than flipping a coin.

But once they can convince the public with their own theories and beliefs, they will form a powerful force, crushing all doubts and resistance, and pushing the wheel of history forward.

Negative bias means that negative information touches people more than positive information, and people feel more strongly about losses than gains of the same amount. Psychologists have done many experiments and found that the impact of loss on people is roughly equivalent to twice that of gain.

Roughly speaking, the pain of losing 100 yuan is about the same as picking up 200 yuan. This is a very important discovery in psychology. It appears that humans are naturally depressive animals.

Why does the human brain pay more attention to negative information, and negative emotions have a stronger impact on people? I think it can be explained by the risk-benefit asymmetry.

For example, the women of the hunter-gatherer tribe found a large piece of mushrooms, but they didnt know if the mushrooms were poisonous, should they eat them?

The answer is obviously no, because even if the mushroom is not poisonous, the benefit of eating it is just an extra meal. If the mushroom is poisonous, many people in the tribe may die because of it.

To give another example, a hunter is running on the grass to chase his prey. He finds something in the grass a few meters ahead. It looks like a branch, but it also looks a bit like a snake. Should he stop and observe?

A reasonable choice is of course to stop and observe, because even if there is only a small probability that it is a snake, it should not be careless. The current management science has a sound theory about risk management, including how to quantify risk, determine the priority of risk response, and so on.

But after you finish learning, you will find that these are actually common sense, which have long been printed in our brains. Our ancestors knew how to choose without doing calculations.

A striking example of negativity bias is documented in the BBC documentary Human Odaily. A hunter of the Dorobo tribe in Kenya walks firmly towards a pride of lions that are hunting for food. Frightened by the fear of the unknown, the lion handed over the wildebeest it had finally caught and left it to the hunter.

This example tells us that not only humans, but even animals have negative biases. The vast majority of lions have never experienced direct conflict with humans throughout their lives. So when the hunter approached, the lion couldnt judge whether he was in an advantage or a disadvantage, so he chose to escape to be on the safe side.

At some point in time, Dorobo hunters discovered that lions had a negative bias that they could exploit and develop into an effective hunting pattern. The advantage of human beings is that they can summarize and pass on experience, use reason to restrain their own psychological biases, and use their opponents psychological biases. Therefore, human beings are well-deserved spirits of all things.

But in the capital market, risk and return are symmetrical in most cases. Even the space for gains is much greater than the space for losses.

For example, in recent months, various experts have begun to claim that Bitcoin will return to zero. This is typical of a bear market.

But when we compare 2019 with 2015, the number of Bitcoin users has increased by an order of magnitude and is more decentralized. The risk of Bitcoin going to zero is already very low. Moreover, the price of Bitcoin is more than 3,000 US dollars, and the room for rise is far more than doubled.

But in a bear market, investors are generally clouded by negative sentiment. Off-market funds dare not come in, and irrational investors are overly fearful of possible losses, and still choose to sell at an already undervalued price level.

In such a market environment, we should use rationality to control our own negative biases like the Dorobo hunters, and use the negative biases of others to achieve results.

Lets talk about forced selling again. Being forced to sell is not a psychological bias. But it is closely related to psychological bias.

First, forced selling is caused by excessive buying caused by overconfidence, and second, forced buying, along with negative bias, is the main reason for the endless decline of bear markets.

Let me first talk about a famous allusion in the currency circle-the story of Brother Sibawanwan. This person opened a post on Baidu Bitcoin Bar on January 28, 2014, saying that he bought 100 bitcoins with the 480,000 yuan house money saved by his family for seven or eight years, with an average price of 4,800 yuan.

He said complacently in the post, I look forward to making a lot of money. I bought the house and paid the full price. Fortunately, my car was also replaced. After two weeks, there was a small profit, and he posted that he would not sell it in the short term. , unless doubled. But soon, the price of bitcoin fell to 2000. Some people cheered him up in the post bar, but more of them were sarcasm and sarcasm.

The host is still updating posts from time to time, most of which are describing his life status, such as how to lie to his fiancée and parents, and who to ask to borrow money to make up for the loss of hundreds of thousands of yuan.

In the middle, the market once picked up and rose back to 3,600 yuan. Many netizens were happy for him, but he still insisted that the bitcoin could reach 4,800 yuan again, and he would not throw any of it. The end of 2014 was the darkest day, and his account fell to only 190,000. Hold on, dont get overwhelmed. A well-meaning netizen comforted him.

At the beginning of 2016, Bitcoin picked up again and reached around 3,000 yuan. After two years of persistence, he finally couldnt hold back and cut his flesh. Toss the coin and buy a house. He replied lightly in the post. After two years of ups and downs in the currency market, after 480,000 became 300,000, this ID has never appeared again.

Of course, everyone knows what happened next. More than a year after Brother 480,000 cut his flesh, the price of bitcoin reached its peak, and the current price of 100 bitcoins was up to 15 million. Brother 480,000s failure was not because he didnt last an extra year.

I used the money from my marriage to buy a house to buy Bitcoin, and I fought wits and courage with my family for more than two years. I don’t know about others, and I can’t do it anyway. The reason why his investment failed was that the buying was leveraged.

Leverage comes in many forms, and contracts are just one of the most obvious. Personal investment with funds that have been included in the expenditure plan is also leveraged.

When the market conditions are good, companies expand their scale, funds spring up like mushrooms after rain, and ICO projects follow one after another. The project parties are happy from ear to ear with ETH reaching new highs in their hands, all of which are increasing leverage.

Once the price reverses, everything reverses, and the strategy that made the most and fastest money immediately becomes the strategy that loses the most money and the fastest.

Enterprises began to lay off employees and shrink their business scope. The fund was forced to liquidate, and the project party was holding more and more worthless ETH, so they had to be ruthless in selling it. If they sold it early, they still hoped to survive the cold winter.

Those who make the most money in a bull market are those who increase leverage the most. They have earned illusions from making money, and they are all pretentious, thinking that they are geniuses.

The most pitiful thing is the newcomers who entered the market later. What they heard about getting rich was wrong. They felt that they were late, so they increased their leverage even more to catch up with others. They are the earliest and worst in the bear market. that group of people.

Those who really understand investment will understand a basic truth, the future is uncertain and there are many possibilities. Therefore, his capital allocation and position control will not only consider one situation.

Its about adapting to a few of the most likely scenarios and avoiding big losses if the predictions are all wrong. Therefore, the allocation of funds by outstanding investors is not optimal for any single situation.

It can be inferred from this that, in any market environment, the one with the highest rate of return is not an investment master, but a courageous mediocre one. Their unilateral strategy happened to fit the market trend.

So here I give a counterintuitive investment principle: Dont be the person who makes the most money, or dont try to make the most money.

So to avoid being trapped in forced selling, just dont increase leverage. Brother 480,000 if he only buys 10 bitcoins. You dont have to live a dark life for more than two years, and you may still earn 1.8 million in the end. Regarding the capital allocation ratio of encrypted assets, we will discuss it at the end of this article.

In the 1950s, social psychologist Solomon Asch did a famous experiment. He gave subjects two cards, like the one drawn on the left side of the picture above, and then asked the three line segments of card 2, which one is the same as The line segments in card 1 are the same length.

Even a child can easily tell which one is in the middle. Of course Aschs experiment was not that simple. He asked seven subjects to participate in the test, and colluded with six of them to deliberately make a mistake, saying that the right line segment in card 2 was the same length as that in card 1.

After all six people made mistakes on purpose, ask the seventh person. In fact, only this person is the subject, and the others are experimental conditions. Shockingly, most of the subjects would agree with the previous six that they made the obvious wrong choice.

There were two explanations for this experiment at the time. One explanation was social pressure, that is, the subjects deliberately made mistakes in order to avoid embarrassment. The second explanation is that other peoples opinions influenced the subjects perceptions, meaning that the subjects really thought so, rather than lying on purpose.

So which explanation is correct? Later, with the advancement of brain science, scientists came up with a way to answer this question. They scanned the subjects brain with an MRI as he responded.

If the social pressure theory holds, the forebrain, which handles social and rational thinking, is active before he can answer. And if the whole process has nothing to do with social and rational thinking, then only a specific area of ​​the back of the brain that deals with vision is active. Through such an ingeniously designed experiment, the question was answered.

You may wish to guess the result yourself. The answer is that, without social pressure, the subjects made bad choices based on sight alone. In other words, the choices of the first six people directly affect the visual cognition of the seventh person.

We often say that seeing is believing, but in fact our vision is unreliable and we blindly follow others. This is the herd effect.

The name herd effect shows that this is not a unique psychology of human beings. So why have many animals, including humans, evolved the psychological mechanism of herding?

There are two main reasons. The first is that groups do, in some cases, have higher intelligence than individuals.

So there is a special concept called swarm intelligence. The most notable examples are social insects such as ants and bees. Although individual ants are hardly intelligent, the ant society does operate economically and orderly.

The efficient market hypothesis is also related to group intelligence. Although the information held by individual participants is not uniform, it is clear that the sum of the information held by the group is greater than that of the individual. Therefore, asset prices are generated by group decisions, and it is very difficult to beat the market.

Similarly, opinion polls often turn out better than expert forecasts. The prediction market of the blockchain industry is to market and commercialize the wisdom of the crowd.

On the other hand, there are still many situations where the rationality and wisdom of groups are far lower than that of individuals. The pioneering work of group psychology The Crowd discusses such phenomena.

The second reason for the herd effect is that in some cases, the groups choice will naturally become the correct choice. Such examples are too numerous to mention. Human beings are social animals, and individuals can hardly survive without society.

So following the crowd is correct in most cases. When an individual is separated from the group, he will feel nervous and lonely. This is the law of evolution telling us that a single individual is very weak and faces a huge risk of survival.

So you can see that herding is not always harmful. Like other psychological biases, it has survived because it provided an extra survival gain over the long course of human evolution.

It is only in certain environments, such as in the capital market, that psychological mechanisms affect the quality of investment decisions, so it becomes a psychological bias.

Herding is a special psychological bias that works not to have a specific effect but to amplify the effects of other psychological biases. He can make the excessive optimism or negative bias in the crowd reinforce each other. The greater the density of the community and the closer the association, the more significant the herding effect.

Among the four major communities in China, the United States, Japan and South Korea, South Korea has the strongest herding effect. Therefore, when the bull market is looking for the top, it will focus on South Korea, observe the changes in the sentiment of the Korean market, and predict when the extreme optimism will reverse. Of course, maybe in the next round of bull market, there will be communities with stronger herd effect to participate.

Also be aware that herding can be exploited intentionally. The dealer pretends to be the leading sheep and leads the sheep to the preset trap. We say that the herd effect is an amplifier of psychological bias. Price manipulation uses peoples FOMO psychology. At the same time, demonstrations and samples will be launched to drive ordinary investors into the game.

The herd effect is the reason why ordinary investors lose money, and it is also a tool for outstanding investors to make profits. First of all, you have to understand that in any market, there are only a few people who make a lot of money. The definition of rich is richer than ordinary people.

So logically speaking, the rich can only be a minority. The corollary is that you can never make a lot of money by following the crowd. If your goal is to make a lot of money, you have to be special, at least in some key choices.

That is to walk against the flock, which of course is not easy to do, because human nature is against it, and you will fall into loneliness, tension and anxiety, like a person lost in the wild. But I want to tell you that these are the inevitable experiences of outstanding investment.

Persisting in independent thinking and sticking to ones own judgment is the only way to get rich through investment. But at the same time, you should understand that, unlike everyones choices, you are likely to make mistakes. So being a maverick is not an end in itself, and we should choose to be a minority under the most certain circumstances.

Since the capital market is a complex system with many participants, the short-term trend of asset prices can be considered random.

But human beings are always accustomed to summarizing and discovering causal laws through phenomena, especially looking for causal relationships between human actions and subsequent phenomena, which we call causal bias. So randomness interferes with our cognition.

In fact, not only humans have causal bias, but even animals have it. BF Skinner, a psychologist at Indiana University, conducted a set of experiments with pigeons and published his famous paper The Superstition of Pigeons in 1948 in the Journal of Experimental Psychology.

This experiment is like this, put the pigeons in a hungry state in the cage, and release a little food to the pigeons through the funnel at regular intervals. After many repetitions, the pigeon will invent a set of motions to pray for food, like a dance.

Although the appearance of the food has nothing to do with the dance, the pigeons insist on their faith and tirelessly repeat what they think is an effective way of praying.

Nassim Nicholas Taleb, author of Black Swan and Antifragility, told a story of his own. Taleb was a trader at Credit Suisse First Boston when he was young. One morning, he ran into a taxi driver from an unknown country.

Taleb entered the company from the usual entrance, but he had a particularly good market record that day and earned a lot of money. The next day, he wanted to find the driver who didnt understand English and planned to give him a good tip, but he couldnt find it.

He asked the taxi to drop him off at the usual entrance, and on the elevator he noticed that he was still wearing the coffee-stained tie from yesterday. Suddenly, he realized that he was caught in a causal bias, unconsciously trying to repeat everything from yesterday.

This story is written by him in the book Fool Who Wandered Randomly. Fool Who Walks Randomly is much thinner than Black Swan and Antifragile, and it is more readable, so I recommend everyone to read this book first.

If you have a feeling after reading it, go to Black Swan and Anti-Fragile.

The only shortcoming of Fools Walking Randomly is that the translation is not good. The translator is obviously not familiar with the financial market, and many names are translated wrongly, and even hedge funds are translated as hedge funds. The title of the book is also translated incorrectly. Fooled by Randomness should be translated as Fooled by Randomness. Lets make do with it.

Lets talk about another characteristic of random phenomena. There is a professor of statistics, in order to let students understand what is random, in the first class of each semester, he will play a game. The professor asked each student to imagine tossing a coin 100 times in a row, and write down the possible results on paper.

At the same time, pick a classmate to actually flip a coin 100 times and record the result. The professor will leave the classroom during this process. After everyone handed in their results, she went back to the classroom, took a quick look, and quickly guessed which one was the real coin toss record.

Over the years, there has never been a wrong guess. How did she do it? In fact, it is very simple. The professor will choose the result with the longest word or head in a row, which is the result of the real coin toss. People always think that randomness is randomness, but they dont know that real randomness doesnt look so random.

It is precisely those sequences that appear somewhat regular that are truly random results. Another example, if you often look at clouds, you will find that from time to time, some clouds resemble something, or even someones face.

But you can try and pre-think an object, like a printer or an owl. I dare say that even if you look at clouds for a lifetime, you will never fail to come across a cloud that is similar in shape to the object you envision.

This is a combination problem. The probability that a certain cloud in the sky is similar to one of the countless objects in the world is actually quite high, but the probability of being similar to a specific object is almost zero.

The most random phenomenon that interferes with investors is the price trend, and countless investors try to find a certain pattern through the trend chart. This is equivalent to staring at the clouds every day, trying to sum up the rules and predict the shape of the clouds tomorrow.

Of course, I am not saying that the price trend of cryptocurrencies is completely random. After all, the cryptocurrency market is not a completely efficient market.

In July last year, two economists from Yale University released a research report titled Risk and Return of Cryptocurrency, which used statistical methods to prove that the price of cryptocurrency has a time momentum effect. Simply put, the price has a certain inertia .

Teams engaged in quantitative trading can develop trading strategies based on momentum effects for arbitrage. Of course, the result of sufficient arbitrage will make such a specific law disappear. Market inefficiency is not a talisman for the so-called techno-graphics, since numerous studies have shown that the human brain has not evolved statistical abilities.

Trying to spot patterns in asset prices visually is no different than a pigeon begging for food with a dance it invented itself. There is no randomness in human nature, only cause and effect. So we will try to find reasonable explanations for all phenomena.

Every time the market suddenly rises or falls, investors will pay attention to what happened? Whats the matter? The media will come up with some plausible explanations, identifying events that happened that day or even a few days ago as the reason for the price change. In fact, most of the time, there is no direct cause for asset price changes.

In other words, the market does not need new information, and only the game will cause asset price fluctuations.

Human beings attachment to causality is also produced in evolution. The illusion of causality combined with overconfidence creates hindsight. Almost every investor, including myself, is used to talking about investment history like this: Actually, I knew at the time..., just because of..., so so so.

Anyway, my judgment is correct, but it is only because of the interference of external factors that the loss or profit is not much. Compared with technical analysis, quantitative trading has a huge improvement, which is backtesting. Execute trading strategies against historical data, at least for historical data, backtesting can draw objective conclusions.

Randomness can also seriously interfere with investor sentiment. Assuming an investment with an expected annual rate of return of 15% and an annual volatility of 10%, this is a pretty good investment with a 93% probability of making a profit in one year.

But if you look at it once a month, the probability of seeing it in a profitable state per observation is only 67%. So if you observe it every day, every hour, or even every minute. This investment is only profitable a little over 50% of the time.

In other words, nearly half of the observations will see it in the red. So can you still be sure its a good investment? And as mentioned earlier, negative emotions have more impact on people than positive emotions, with a quantitative relationship of 2 to 1.

That is to say, once a month is observed, the pleasure brought by the profit and the pain brought by the loss are roughly balanced. The more frequently observed, the greater the psychological toll. Moreover, strong negative emotions will prompt investors to make irrational investment decisions and sell good assets at too low prices.

Converting this investment into Bitcoin, the annual expected rate of return is very high, about 100%, but the annual volatility is higher, exceeding 100%. Then every time you look at the market, the probability of profit and loss is similar.

Although money has been made in the past few years, in the process, investors will continue to face the impact of negative emotions, which will reduce the quality of life in the past few years. We imagine we have an emotional account, with pleasure as income and pain as expenditure.

If you invest in cryptocurrencies and often watch the market, regardless of whether the capital account is profitable or not, the emotional account will lose money. If we pay more attention to the process of life than the amount of wealth, then those who cannot get rid of the interference of randomness should stay away from the capital market.

In 2017 and 18, many investors in the currency circle fell into market anxiety. Calling it a disease means that it is already a certain kind of mental illness.

Typical symptoms are: Feeling anxious after not watching the market for a period of time, some people keep watching the market while eating or going to the bathroom in the car. Even when I get up at night, I have to take a look at it. If it rises, I can’t sleep, and if it falls, I can’t sleep. Neither up nor down, I still stare at it, for fear of falling asleep and missing the ups and downs.

In this way, of course, there will be no intention to work and no entertainment, which will have a significant negative impact on life. The bear market is a special medicine for market anxiety. Now most of the patients have recovered and are waiting for the next round of bull market to relapse.

So is there any way to actively treat market anxiety? It is not completely impossible, the basic idea is to divert attention. Uninstall the mobile phone software of the market, reduce contact with people or things that may be associated with the market, and do things that you usually want to do but have no time to do.

Such as playing games, watching soap operas, reading novels. I recommend two sets of books to students who love to read martial arts novels. One is the old book The Legend of Double Dragons of the Tang Dynasty;

Both sets are brilliantly written and addictive reads. Moreover, they are all five to six million-word masterpieces. If you read them for two hours a day at a normal reading speed, you can probably read them for two months. If the market anxiety is not too serious, it can almost be cured.

If you really cant get rid of anxiety, you might as well learn from Wozniak, the co-founder of Apple. Wozniak said that when Bitcoin is at a high price, I dont want to be the kind of person who always pays attention to price changes.

I didnt want that worry mixed with my happiness, so I sold it all and got rid of it. If you agree that life is a journey, and the key is the scenery you see and the mood you see, then Wozniaks choice is a matter of course.

This article is reposted from the public account: A chain of learning community, an online learning community for cultivating core blockchain talents.