Perception and reality

Tuesday 09NOV2010 0229GMT

OK, so I said there would be two posts today, and so far my forecast is correct, this being today’s second post. While the first post was another ‘bits and pieces’ post with a bit of fun chucked on, this post, I hope, might be in some way related to trading.

I read an article over the weekend, actually I read a few articles, but I read this one article that has slowly caused a bit of a light bulb to illuminate in my mind. I say slowly. As soon as I read the relevant part I thought it would have some relevance, and having turned it over in my mind in the past 48 hours or so I wanted to share it.

The article is The Itch, on the New Yorker website.
It is a great article, a great read and very thought-provoking, but I want to focus on the relevance it might have to a trader. Now, let me preface my remarks by saying what I read in the article is all I know about the phenomenon it describes. It may well be complete rubbish, unscientific claptrap, I don’t know. And my reading of it might well be mistaken, too. So the old adage of DYOR applies.

Some words direct from the article (but reading the whole thing is better), and the bolding is my attempt at summarizing even this short extract:

The images in our mind are extraordinarily rich. We can tell if something is liquid or solid, heavy or light, dead or alive. But the information we work from is poor—a distorted, two-dimensional transmission with entire spots missing. So the mind fills in most of the picture. You can get a sense of this from brain-anatomy studies. If visual sensations were primarily received rather than constructed by the brain, you’d expect that most of the fibres going to the brain’s primary visual cortex would come from the retina. Instead, scientists have found that only twenty per cent do; eighty per cent come downward from regions of the brain governing functions like memory. Richard Gregory, a prominent British neuropsychologist, estimates that visual perception is more than ninety per cent memory and less than ten per cent sensory nerve signals…
The fallacy of reducing perception to reception is especially clear when it comes to phantom limbs…
the feelings people experience in their phantom limbs are far too varied and rich to be explained by the random firings of a bruised nerve. People report not just pain but also sensations of sweatiness, heat, texture, and movement in a missing limb. There is no experience people have with real limbs that they do not experience with phantom limbs. They feel their phantom leg swinging, water trickling down a phantom arm, a phantom ring becoming too tight for a phantom digit. Children have used phantom fingers to count and solve arithmetic problems…
You’ve likely had an experience of phantom sensation yourself. When the dentist gives you a local anesthetic, and your lip goes numb, the nerves go dead. Yet you don’t feel your lip disappear. Quite the opposite: it feels larger and plumper than normal, even though you can see in a mirror that the size hasn’t changed.

The account of perception that’s starting to emerge is what we might call the “brain’s best guess” theory of perception: perception is the brain’s best guess about what is happening in the outside world. The mind integrates scattered, weak, rudimentary signals from a variety of sensory channels, information from past experiences, and hard-wired processes, and produces a sensory experience full of brain-provided color, sound, texture, and meaning. We see a friendly yellow Labrador bounding behind a picket fence not because that is the transmission we receive but because this is the perception our weaver-brain assembles as its best hypothesis of what is out there from the slivers of information we get. Perception is inference.

The theory—and a theory is all it is right now—has begun to make sense of some bewildering phenomena.

It is a long article, and I have only quoted a tiny part, so to get the full picture, read the article. But what I want to focus on is the idea that perception is not just what is coming in through the eyes (and the other senses, of course, but it is primarily the eyes that a trader uses, looking at charts etc., although hearing can also be used if a trader is utilising something like pit noise) but is also influenced by brain functions like memory.

I am writing from the perspective of a tape-reading trader. Maybe those traders who codify their trading decisions into a rigid system (‘buy when the blue line crosses the red line’ … sorry, I simplify, but hopefully you get the idea) will not find any use in what I am talking about, but for those of us who rely on ‘tape-reading’, assessing order flow, seeing support and resistance forming, seeing the weak side and the strong side, maybe looking at real-time correlations across markets, and so on, the quality of your perception has got to be important, right?

So, the adage is ‘Trade what you see’ (and for those wags who respond “I see dead people”, I have heard it before and it still cracks me up! I quite like this one, too “I see dead people 2”), but what am I seeing? When viewing the tape (I view the tape through a series of charts scrolling across my screens), how much of the assessment I am doing is based on the visual display of activity in the market, and how much is based on factors other than the visual part of the perception? Can I improve the construction of the charts to improve the quality of my perception? What else can I do – recognize non-visual elements of my perception, acknowledge them and allow for them?

Anyway, I’m not proposing answers here, just questions. Hope it is helpful.

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