Heads. Heads. Heads. Heads. Heads.

I think such explanations are especially popular in times of rampant uncertainty, which is where we are now. After all, if we understand the movement of the financial markets then we have a modicum of control - we know when to buy and sell - and people love control. In one classic 1975 study led by Ellen Langer, male undergrads at Yale were asked to predict the results of coin tosses, a cliched example of a random event. Nevertheless, a significant number of the men believed that their performance improved through practice - they got better at calling heads or tails - and that distraction would detract from their performance. How did they justify this wishful thinking? As Langer notes, the men engaged in some sly cognitive filtering and consistently "overremembered past successes".

Is Wall Street any different? The market, after all, is a classic example of a "random walk," since the past movement of any particular stock cannot be used to predict its future movement. Given this inherent stochasticity, it's silly to attempt to explain the daily movement of the market: such an endeavor is like analyzing a series of flipped coins, or trying to explain the payout patterns of a slot machine. We can construct theories - and some of these theories might even sound intelligent - but they're ultimately futile attempts to stave off the flux.

What's even more disturbing is that such errant explanations might actually cost us money, since they lead, inevitably, to over-confidence. (Those Yale undergrads vastly overestimated their ability to predict coin flips.) We become so convinced that the logical-sounding explanations are true that we forget we're dealing with a random, inherently unpredictable system. The end result is too much trading.

The Frontal Cortex