More on trading addictions

wall-street-grab.jpg

Reading this ‘New Statesmen’ supplement on addiction, I came across the following quote:  

Raj Persaud … Everyone is addicted to something. In the film Wall Street, Martin Sheen says to Gordon Gecko, “When is enough enough?” because Gordon Gecko is already worth hundreds of millions and is hell-bent on destroying yet another company in order to strip its assets and to have yet more money. For Gordon Gecko, there is no enough.

We are biologically wired to be addictive because we have endogenous opiates. We have a reward system within us that makes evolutionary sense at some level to have certain addictions. When we taste a sugary food, our brain is wired to be very rewarded by that and to seek more sugary foods. Millions of years ago, it made biological sense because we were living in an environment where there was scarcity. Now we live in an environment where you can have as much sugary food as you like and you have to exercise self-restraint. You have to act against your own biology. The commercial world encourages a lack of self restraint because it is in advertisers’ and products’ interests to get people not to exercise self-restraint, so you have advertising slogans like “Naughty but nice” and “Go on, treat yourself”.

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6 responses to “More on trading addictions

  1. I assume a money addict requires a steady or increasing percentage return. It would be interesting to test whether the market performs worse after a run of exponential returns than otherwise (for instance after 4 quarters in a row with each more than 5%).

    The hypothesis is that the public sometimes gets addicted to money and thus creates overinflated prices.

  2. Hi JP, I also thought about this. My original thought was that perhaps the ever steepening curve we see in bubbles reflects the percentage returns demanded by investors, which may be the same as time passes but in an environment of rising prices would translate into an ever steeper (nominal) price chart. Maybe I need to augment this picture with the public demanding an increasing percentage return, which would make the charts even steeper.

  3. Just made a small test. Some results on http://developingtrader.com/070618.php.

    It’s more an experiment with testing criteria though. A test on what happens after runs of quarters with more than (for instance) 5% would be much better.

  4. Jan-Petter Janssen

    Just made a small test. Some results on http://developingtrader.com/070618.php .

    It’s more an experiment with testing criteria though. A test on what happens after runs of quarters with more than (for instance) 5% would be much better.

  5. Nice little test, it does seem to argue against shorting the rallying quarters?

  6. Yes.

    I guess the theoretical explanation is that large fluctuations create fear (“fear of heights”), and thus should the higher risk be compensated with higher return.

    I wonder that instead of modeling the market as normal distributed with a fixed expectancy and standard deviation – one should make a model where these sizes increase with the magnitude of recent moves.

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