« The solution: sit on your hands. »
I know soccer is not a passion in the US as it is in other countries like Italy, Brazil, Argentina, England, and Spain. In those places, that is the only thing people talk about usually in heated conversations moistened with some local alcoholic beverage.
One day, some guys decided to run an experiment to evaluate the goalkeepers’ decision-making process during penalty kicks. What they discovered was quite interesting.
The probability of a player kicking the ball to the left side, to the right or to the middle was about 33% each. However, on the defense side of things, the probabilities were a little bit skewed. If the goalkeeper stayed in the middle the chances of him catching the penalty kick were about 60%. Problem solved, right?
Wrong.
“People can often anticipate the outcome of another person’s actions based on visual information available in the movements of the other person’s body.[…]” This was the topic of another study called “Anticipation From Biological Motion: The Goalkeeper Problem”, published in the Journal of Experimental Psychology. The authors studied how goalkeepers anticipate the direction of a penalty kick in soccer.
In essence, athletes often try to gain a competitive edge by predicting their opponent’s next move. Even if you tell a goalkeeper that standing in the middle will increase his chance of catching the ball, his brain is wired in such a way that he will move no matter what.
Which leads us to trading and investing. How many times did we fall into this trap of anticipating price movements and taking action before anything concrete happens? How many times did we realize that doing nothing was the wiser decision? Countless.
How to avoid it? Have rules and run them with no improvisations. Sit on your hands and don’t base your actions on price movement anticipation.
Chart of the Day
Interest Rates vs. Monetary Base
The charts above cross interest rate with monetary base (as a percentage of the GDP) on the US dollar, Euro, and Japanese Yen since 1960. Since 2009 Central banks have been lowering interest rates and doing quantitative easing (i.e., printing money and buying financial assets) in ways that are unsustainable.
(Source: Paradigm Shifts by Ray Dalio)
Video of the day
How not to trade
Try not to laugh.
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