January 30, 2015

Magical Markets, Swiss Franc, and Social Earnings Forecasts

We realise that you will think your own experience while watching magic is unique to you, but we know that, in general, everyone thinks in more or less the same way.  Even as it gets harder to apply a technological edge, applying a psychological edge offers us nearly limitless possibilities.
~ David Blaine

In his TED talk "How I held my breath for 17 minutes," magician and endurance performer David Blaine recalls several of his jaw-dropping performances.  How magicians misdirect the attention and perceptions of groups has lessons for investors, which we will explain deeper in this newsletter.
 

One of the wonderful things about the art of magic is that it doesn’t really matter where the trapdoor is.  That’s not the secret.  The secret is that magicians influence what you think by using your own preconceived ideas of the world around you to amaze you.
~ David Blaine

Gustav Kuhn, a cognitive psychologist and magician, studies how magic tricks work.  In one study Kuhn threw a ball into the air.  When it came back down he caught it, and he threw it back up in the air, his eyes following it up.  He did this twice, and on the third throw he pretended to throw it up while his eyes tracked the invisible arc of its course. Two thirds of the participants reported seeing the ball vanish in mid-air, even though it never left his hand.  In a second condition, he pretended to throw the ball in the air, but instead of tracking it with his eyes, he stared at the ball in his hand.  In that condition only one-third of the subjects believed he had thrown the ball into the air.  Participants misperceived the actual event based on their expectations, as set by the magician.

According to Kuhn, "Even though the ball never left the hand, the reason people saw it leave is because they expected the ball to leave the hand. It's the beliefs about what should happen that override the actual visual input."

As humans we are hardwired to perceive patterns and to develop beliefs that even reality cannot shake.  Magicians learn how to set beliefs, misdirect attention, and trick our senses.  Some of their tricks parallel the ways in which markets collectively fool investors.

In today’s newsletter we review what we can learn from magicians, the untethering of the Swiss Franc (CHF), this weeks’ tech stock earnings, recent quantitative stock results, and when we should believe our market perceptions versus when we should doubt them.  As usual it's a fairly long newsletter today, so feel free to skip ahead to the topics or images of interest.