Source: https://www.linkedin.com/feed/update/urn%3Ali%3AugcPost%3A6898696391040782336
#WSJ: “Extraordinary Popular #Delusions and the #Madness of #Crowds,” – Charles Mackay: https://lnkd.in/eH7kTuj7: “Men, it has been well said, think in herds; it will be seen that they go mad in #herds, while they only recover their #senses slowly, one by one.”
We find that whole #communities suddenly #fix their #minds upon one object, and go mad in its pursuit; that #millions of people become simultaneously impressed with one #delusion, and run after it, till their #attention is caught by some new #folly more #captivating than the first.
#Psychology of #Nudge #Reinforcement #Learning
Since #behaviorist #BFSkinner’s #experiments on the variable #reward ratio in the 1950s, #games of #chance such as #slot #machines and their #digital #equivalents have been designed to provide #stimuli that, for far too many people, lead to #addiction. While the #stock #market isn’t really “a #casino,” as some critics contend, the newest generation of #smartphone based #trading #apps borrow heavily from the #gambling world to create #engagement.
Meanwhile, the #DunningKrugerEffect – the #behavioral #bias that makes #novices #overconfident in their abilities–was put on steroids by the pandemic. And when they opened the #app, #Robinhood and others showed them the day’s #most #active #stocks for a reason–to stoke the #FOMO which is related to #feelings of #regret. When the newest #speculators #buy too late or #sell too early to make a #score, they are encouraged to keep trying, as #exploited by #gambling establishments through the #nearmiss #effect.
#Trading isn’t really #free–huge #marketmakers gladly pay #brokers to fill their #customers’ #orders–but the fact that #small #investors who have never paid a #commission in their lives perceive it as #costing nothing has triggered the “ #zero-#price #effect ” described by #behavioral #finance experts. #Demand normally rises when #prices fall. The #formula goes #haywire once #prices hit nothing for something that also #entertains us. #Trading #stonks for “free” has been made so much like a #game that #retail #activity has exploded.
This shift to #zero at every #major #broker happened just in time for the #pandemic, which supercharged #locked-#down and bored young people’s #speculative tendencies. And because they got “ #house #money ” via #stimulus #checks [along with record-high #margins from #ZIRP] #investors’ sometimes crippling #fear of #financial #loss as described by #ProspectTheory was short-circuited at a critical time. Millions opened #accounts, many of whom had already dabbled in recently-legalized #sports #betting and found they liked #stocks even more. The sharp #market #rebound from the initial pandemic #plunge created #unprecedented #volatility and #excitement. And #brokerages’ irresponsibility in allowing #newbies to #trade #complex #stock #options, with their #asymmetric #payoffs and #finite #time #horizon, made #investing resemble #sports #betting.
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