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  • Phil Davis' Mircowave Oven Theory of Behavior 2 comments
    Jun 15, 2010 4:00 AM | about stocks: AAPL

    I mentioned my Microwave Oven Theory this morning and I didn't realize it was hard to find so here it is again:

    Last Thursday, I mentioned that Jim Rogers said:

    I am as confused as anybody else (about the level of bearishness on the Euro).  Usually that indicates a rally… Once a technical rally starts, who knows where it can go from that. 

    Don't you wish other people would be that honest with us?  It's very hard for people who give opinions for a living to stand in front of an audience and say: "I don't know."   Somehow they seem to feel that they HAVE to know and, what's worse, once they force themselves to make a decision, they somehow feel obligated to defend it, even if new evidence comes out to the contrary.

    This is exactly what's wrong with financial reporters and analysts, especially the clowns on TV (as well as pretty much anyone who makes a living giving you their opinion).   My Members are familiar with something I'm going to share with you now.  It is a Nobel Prize-worthy theory that I feel helps make me a better trader and I thought this would be a good time to share it with you:

    People love to make random decisions and stick to them like they were directly given it as a commandment!

    How does this relate to microwaves? Well, aside from the fact that our brains are constantly being fried by the things every day (ever drive on the highway and see one of those dishes aimed right at you?  Do you know birds die if they fly too close to them?), this is what I observe:

    You put something in the microwave, say pizza, and you put in a time, say 3:33 (or maybe you are a whole number person and do 3 or 4 minutes). Now, unless you are a chain store pizza buyer your pizza slice is probably not always the same size or maybe it has different toppings etc., but you probably put in the same number every time.

    Theory number 1:  People tend to repeat behavior, especially if it was successful in the past.

    So the light goes on and the little thing spins and you are either a watcher or a walker (as you may have guessed - I hit the button and leave the room!), but either way you usually end up standing by the oven with 20 or 30 seconds to go waiting for it to stop.

    Here's where the Nobel Prize committee has to recognize me:

    Theory number 2:  Everyone likes to think they KNEW (not know) something. 

    • Now you are standing there watching the pizza spin and looking at the timer.
    • You may think it is done.
    • You may KNOW it is done (you see cheese boiling)
    • You may be hungry.
    • You may be in a hurry.

    But - you WILL wait and you WILL watch the little numbers count down until you hear that beep.  Go on, try it - I dare you to open the door with 3 seconds left!

    Theory number 3:  We stick to arbitrary prior decisions despite new information to the contrary.

    You pick a random number of seconds to cook food and then, despite observations to the contrary or a change in the situation, you stick to your original decision.  In fact - you are trapped by it!   It is very, very hard to ignore your own advice, even though you didn't intend it to be advice to your future self at the time - just a number you picked on a whim. Your future self always defers to you (your past self) because he/she thinks you are/were the greatest thing since sliced bread.

    This is what happens to people just 3 minutes after a decision is made, what about trade decisions that are made days or weeks ago?

    Ah hah, so it does go back to trading (I bet you thought I was losing it!)....

    Rather than re-research, reread, rethink, reexamine our targets, we tend to treat them as set in stone. Learning not to do this will make you a much better trader (and also help you to finally redecorate the living room or clean out your desk or whatever).

    Old decisions were made by the old you. The new you has learned things since then (even if it was just 3 minutes ago). The new you is older and wiser and more experienced and has had the benefit of reviewing your GUESS (because that is all it was) in light of real world circumstances and the new you is ready to make a BETTER decision.

    Often the new me can't imagine what the old me was thinking when I made a trade or set a target (or gave that girl my phone number) but since I know AND ACCEPT how often the old me makes mistakes, I have no problem overriding my decisions even if it means a complete reversal!

    If you can do that, you can beat the market, because 95% of the people you are trading against cannot let go of those arbitrary targets they set for themselves when circumstances were different.

    When Apple, for example is upgraded to $270 but it stutters at $255, SELL!  Open the door and take the pizza, it's done!!!  If it isn't (you take a bite of your pizza and it's still a bit cold) then get back in.  That's right, the old me bought Apple at $230 last month, when an analyst said $270 and the stock went to $255 in 4 weeks and I feel like a genius so I start counting my $40 profit and thinking about what I will do with it.  The next week it "flatlines" between $240-$250 and volume drops but the old me said $270 and it looks like I was right before, as I'm up $25 - so I should have another $15 coming to me....

    This is terrible logic!!!  Why are you listening to the old you? (I know, it sounds kind of schitzo) You've had 3 weeks of observations (where AAPL struggled in the $260s), yet you are willing to ignore that in order to slavishly follow, not even what you thought, but what some analyst thought 3 weeks ago (and he was probably listening to the old him).

    You are you from the future. Full of knowledge that the old you wishes he had at the time. 

    HOMEWORK: Watch Back to the Future, part 2, where old Biff steals the 1950-2000 sports almanac and gives it to the young 1955 version of himself.  He tells himself all he has to do is pick the winners and he'll never lose.  Obviously, right?  Then why do you keep sticking to decisions you made in the past when you ARE you from the future?  You know more than you did then, listen to yourself - that should be obvious too!   

    Also, watch Deal or No Deal (NBC) with the Microwave Theory in your hand and think about how you make decisions.

    Let me know if this is helpful of if I am losing it - I always like to know how the old me is/was doing!

    "People like us, who believe in physics, know that the distinction between past, present, and future is only a stubbornly persistent illusion." - Einstein

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Comments (2)
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  • Jim P. Smith
    , contributor
    Comments (437) | Send Message
     
    ...microwave theory... I love it!
    15 Jun 2010, 09:28 AM Reply Like
  • David Kern
    , contributor
    Comments (2) | Send Message
     
    Brilliant analogy!
    19 Jun 2010, 07:28 PM Reply Like
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