😎 Market Psychology 😎
contrast = leverage

*a couple of cascading green candles and everyone forgets that the distance is negative.

in any assessment there are 2 quantities:

• level (where we are)
• contrast (how much this differs from what was nearby)
• most people think they trade the level.
• in reality everyone trades the contrast.

***THE BRAIN DOESN'T SEE PRICE / THE BRAIN SEES DIFFERENCE.

THE EXPERIMENT
Haynes, Roth, Stadler & Heinze (2003), J Neurophysiol

148-channel MEG + EEG / 8 subjects.

targets were embedded in a field of high contrast. physically identical / only the orientation of the surrounding background changed.

• against a "matching" background the target was perceived as dimmer
• to be perceived as equal, the second one only needed 60% of the physical contrast
• 40% of the signal simply disappeared • meanwhile cortical responses to such a pair were INDISTINGUISHABLE
• and to physically identical stimuli they DIFFERED SIGNIFICANTLY.

• a standard of 0.50 matched 0.33 in perception
• a standard of 0.32 - matched 0.18.

dipole localization assigned the early components to primary visual cortex / 87-88% of variance explained.

***THE CORTEX ENCODES NOT THE SIGNAL / BUT THE SIGNAL DIVIDED BY CONTEXT.

THE LATE RESPONSE IS MORE ACCURATE THAN THE EARLY ONE

there are 2 cortical components in the study:

• early (80 ms) - already distorted by the background, but with error at high contrasts
• late (130-180 ms) - predicts perception almost perfectly

the difference comes from slow horizontal connections inside the cortex / 0.1-0.3 m/s.

they need time to drag the context across the network.

meaning the picture doesn't arrive finished.

it is BUILT UP / and it is built up already spoiled by the background.

***YOU DON'T SEE THE MARKET AND THEN INTERPRET IT / YOU ALREADY SEE THE INTERPRETATION.

economists arrived at the same formula knowing nothing about visual cortex - We recommend everyone dig into this work:

• Kahneman & Tversky (1979) - what decides is the deviation from a reference point, not the final level

• Bordalo, Gennaioli & Shleifer (2012) - the weight of an attribute in a choice equals its contrast with the background of alternatives

• Barber & Odean (2008) - retail buys whatever stood out abnormally in volume or return

one and the same computational principle on 2 floors / normalization to the surroundings.

THE CROWD ISN'T DUMB - IT'S NORMALIZED.

synchrony doesn't require the participants to be foolish:

• Bikhchandani, Hirshleifer & Welch (1992) - a cascade arises with fully rational agents
• the public signal outweighs the private one / from there the herd moves in one direction
• Shiller (2017) - a narrative spreads along an epidemic curve = not a logical one.

***THE CROWD'S UNIFORM BEHAVIOR IS NOT COLLUSION AND NOT IDIOCY = IT IS THE EFFECT OF IDENTICAL NORMALIZATION.

MEMORY ≠ SHORT
MEMORY = SKEWED MEMORY

• Greenwood & Shleifer (2014) - expectations are built on the most recent realizations, not on history
• De Bondt & Thaler (1985) - hence overreaction and reversal on the long horizon
• Malmendier & Nagel (2011) - a personally lived-through cycle weighs more than 100 years of statistics

whoever hasn't sat through -80% doesn't know what -80% is - he had no skin in the game.
he READ about it or SERVED it up to the masses / that's a different background and a different scale.

HOW THIS LOOKS ON THE MARKET

• after a month of chop, any move reads as an impulse
• after -60%, a 15% bounce reads as a reversal
• after a year of growth, a correction reads as the end of the world

the price is the same / the background is different / the decisions are opposite.


WHAT CONCLUSION CAN WE DRAW?

• the crowd doesn't see the level / the crowd sees the contrast
• contrast is set by the background / the background is set by the last few weeks
• that's why the behavior reproduces itself every cycle without change
• and that's why it's predictable

**On perception, the crowd never sees the price. only the difference.

😎😎😎😎