In Trading, Why is the Obvious Not So Obvious?

What do monkeys have to teach us about trading? Quite a lot actually. The following is an excerpt from the Hidden Brain podcast by Shankar Vedantam in which he interviews Yale University psychologist Laurie Santos who studies monkeys on a Caribbean island, Cayo Santiago off the coast of Peurto Rico.

VEDANTAM: I want to get to your experiments in a moment. But just being on this island has apparently revealed all kinds of similarities between humans and other animals. One problem you’ve had to guard against on the island is unethical behavior. Tell me about the monkey thieves that you’ve encountered on Cayo Santiago.

SANTOS: Well, you know, it’s kind of sad to admit that you’re getting ripped off by monkeys, but (laughter) it happens more than you’d think on the island. You know, they’re wily creatures who are often pretty hungry. And humans have backpacks filled with things like lunches and delicious fruit objects for studies and so on. And one of the big inspirations for some of the work we were trying to do on deception and kind of how monkeys think about other minds came from this act of theft on behalf of one of the monkeys. We were running a study about numbers where we were showing monkeys different numbers of objects. And there was one research day that we actually had to go home from the island early because the monkeys had ripped off all of the fruit we were using to display the numbers in the study.

VEDANTAM: (Laughter).

SANTOS: And I think it was really on that boat ride home that I started thinking, you know, they’re doing this in a successful way. You know, it’s not just that we’re dumb researchers and they can outsmart us. They’re specifically trying to steal from us when we’re not aware of what they’re doing, or maybe even when we have a false belief about what they’re doing. And so it really launched this line of research to be, like, OK, how are they thinking about that problem, you know, that they’re duping us in? You know, what are the representations they’re using to solve this task?

VEDANTAM: And is it true that they are not just simply stealing but in some ways going after the easiest targets, in some ways what criminologists might call a rational model of crime?

SANTOS: Yeah. In lots of ways. In fact, we set this up as a study. This was work, early work that I did with John Flombaum. We basically set up an experiment where we gave monkeys the opportunity to steal rationally. What we did was we had them experience — they’re kind of walking around, and they see two people who are standing in front of a grape, which is a tasty piece of food for monkeys. One of those people is kind of looking at the grapes so if you tried to steal it, he’d probably stop you, whereas the other person is not paying attention, either because he’s turned around or he has a barrier in front of his face and so on.

And we just gave monkeys one trial. And what we found is that, even on that first trial, monkeys selectively stole from the person who couldn’t see them. In other words, they’re rationally calculating, you know, whether or not someone could detect that they’re about to do something dastardly.

Why do I find this story about our primate relatives so fascinating? Because financial markets are as close to a jungle as human society allows and our behavior within that arena is far more similar to monkeys than we care to admit. Tom Sosnoff, who runs TastyTrade and has seen his share of monkey antics on the floor of the CBOE once told me that most new traders approach the market with the assumption that every trade is a 50-50 bet. In reality, the bet is more like 25 for 75 against, because the markets are always lying to you trying to trick you into the wrong position.

I wrote last week that our ability to lie is the only thing that keeps the markets interesting and available to us humans. Otherwise, computers would have been able to take over long ago and just like in chess beat us senseless every time we trade.

I’ve told you how K and I recently developed a series of visual indicators to help us make better, faster trading decisions. But this week I discovered that these tools can also help me spot some of the market lies. After hours and hours of studying a trading strategy using my visual cues, I realized that the very opposite signals, under certain conditions were actually far better, more profitable and more predictable trades.

In trading, the art of lying is why obvious is not so obvious and why so many good-natured logical people get rolled by the action. That’s why having a flexible attitude is perhaps the greatest skill you can develop in the markets which are almost never what the seem to be.