Friday, August 16, 2013

A Job the Robots Won't Take: Become a Financial Charlatan

This is a repost from May 2012 when we were trying to assist that spring's graduating class.
UPDATED--Are You a Recent Graduate Who Hasn't Found a Job? Consider Becoming a Charlatan

Update: "Follow-up: Choosing the Charlatan Career Path".
Original post:
A field of human endeavor we have studied [some would say participated in -ed] for many years, links after the jump.
From the Stumbling and Mumbling blog:

The strong demand for charlatans

In the improbable event of ever being invited to give a commencement address, my advice to graduates wanting a lucrative career would be: become a charlatan. There has always been a strong demand for witchdoctors, seers, quacks, pundits, mediums, tipsters and forecasters. A nice new paper by Nattavudh Powdthavee and Yohanes Riyanto shows how quickly such demand arises.
They got students in Thailand and Singapore to bet upon a series of five tosses of a fair coin. They were given five numbered envelopes, each of which contained a prediction for the numbered toss. Before the relevant toss, they could pay to see the prediction. After the toss, they could freely see the prediction.
The predictions were organized in such a way that after the first toss half the subjects saw an incorrect prediction and half a correct one, after the second toss a quarter saw two correct predictions, and so on. The set-up is similar to Derren Brown's The System, which gave people randomly-generated tips on horses, with a few people receiving a series of correct tips.
And here's the thing. Subjects who saw just two correct predictions were 15 percentage points more likely to buy a prediction for the third toss than subjects who got a right and wrong prediction in the earlier rounds. Subjects who saw four successive correct tips were 28 percentage points more likely to buy the prediction for the fifth round....MORE
 
The old stock market newsletter scam was to buy a list of names and tell half the people the market would be up and half that it would be down. Do that with a 10,000 name mailing list, cull the ones you were wrong on, rinse and repeat a couple more times and you have 1250 people who think you've been right three times in a row.
What would they be willing to pay for your fourth hot call?
As an example, targeting high net worth individuals, some of the scamsters would sell a subscription to the "Bull" Report or the "Bear" Report for 500 dollars. If a quarter of the final winnowing bought the take was $156,000 which was real money in say 1955, a time when median family income was $4,400 and a postage stamp cost 3 cents.
Previously: 
...when people feel they lack of control in life, they experience sudden increases in “invisible pattern-seeing." "People primed with a sense of powerlessness saw more images in static, found more conspiracies in written stories, and imagined more patterns in financial markets than those who were left alone," Lafsky writes....
That effect is something you must always be on guard against and not just in the markets. I get crabby when folks think they can read my mind. My thinking isn't that transparent. (is it?)
Last week MarketBeat posted "Written in the Stars" wherein somebody I've never heard of says the market would bottom today:
...Panic lows have historically occurred on day 27/28 of the 7th lunar cycle, which are this Sunday and Monday. The panics of 1857/1907/1929/1987/1997 all marked their lows on these days in October!”...
There is a long history of this stuff, everybody wants to know the future.
One of my favorite examples comes from a "American Experience" episode, "The crash of 1929"
(we linked to it in reference to Joe Kennedy's pool manipulation of RCA)*
1929 February: Astrologer Evangeline Adams, who counts Charlie Chaplin, Mary Pickford, and J. P. Morgan among her clients, predicts the market will rise in the coming months.
This is contradicted by her comment:
"In 1928 and 1929... it behooves everyone to be extremely cautious in investment and money matters, and be prepared for this threatening configuration of planets". The stock market crash occurred in October of 1929.
Or it may just be an earlier version of the Cramer technique.
Ms. Adams was reputed to call the crash later that year based on the horoscope of Mr. Morgan's son Henry Sturgis (founder of Morgan Stanley).... 
"S.E.C. Charges Psychic With Securities Fraud"
Should have seen it coming.

"Moonstruck: Lunar Cycle Says Expect Market Rally"
...“Under these conditions,” he continued, “the cerebral cortex cedes much behavioral control to the primitive basal ganglia—wherein neural voltages matter more than earnings and interest rates.”...MORE
Roger that, roving ganglia gangsta gangs ganging up on cortex, over.
You'll notice he uses his middle name. 
That's so you don't confuse him with the charlatan Paul Montgomery.
See also:
Technical analysis
Fundamental analysis
Divination for Dummies
Pitfalls in Prognostication: Fortune Magazine's August, 2000 "Ten Stocks to Last the Decade"
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