10American society is againdisenfranchised.The Haves vs. Have Not’sRed States vs. Blue StatesMain Street vs. Wall StreetMoreover, the demise of high-profile icons— Tiger Woods, Ben Roethlisbergerand Jessie James—suggested that the socionomic tide turned anew.Right?
13The Fork in the RoadPath 1: Deflation; debt destruction, asset classdeflation, dollar appreciation and an outside-inglobalization once the dust settlesPath 2: Give the drunk another drink with hopes hedoesn’t sober up; risk assets rally, dollar declinesand the intense friction in our bifurcated worldmanifests through social mood.
14The Tricky Tri-fectaSocietal Acrimony: Pushback against big business,financial institutions, BP oil spillSocial Unrest: The Tea Party, Occupy Wall Street, riotsin Greece, shootings in U.S schoolsGeopolitical Strife: Middle East, Cyber-warfare, ???
15The Newtown tragedy hit close to home—the tri-state area is a singular community, sports rivalriesnotwithstanding—this could have been Anytown, USA. And it’s not just this senseless act that is so veryhorrifying; it’s the rate and pace at which these events have transpired since 2008:•Feb. 11, 2008 in Memphis, Tennessee: A 17-year-old student at Mitchell High School shot and wounded a classmate in gym class.•Feb. 12, 2008 in Oxnard, California: A 14-year-old boy shot a student at E.O. Green Junior High School causing the 15-year-old victim to be brain dead.•Feb. 14, 2008 in DeKalb, Illinois: A gunman killed five students and wounded 17 more when he opened fire on a classroom at Northern Illinois University.•Nov. 12, 2008 in Fort Lauderdale, Florida: A 15-year-old female student was shot and killed by a classmate at Dillard High School in Fort Lauderdale.•Feb. 5, 2010 in Madison, Alabama: At Discovery Middle School, a ninth-grader was shot by another student during a class change.•Feb. 12, 2010 in Huntsville, Alabama: During a meeting on campus, a biology professor who was denied tenure a year earlier shot her colleagues, killingthree and wounding three others.•March 9, 2010 in Columbus, Ohio: A man opened fire at Ohio State University, killing two employees and wounding one other after receiving an"unsatisfactory" job evaluation.•Jan. 5, 2011 in Omaha, Nebraska: Two people were killed and two more injured in a shooting at Millard South High School. Shortly after being suspendedfrom school, the shooter returned and shot the assistant principal, principal, and the school nurse before taking his own life.•Jan. 5, 2011 in Houston, Texas: Two people opened fire during a Worthing High School powder-puff football game. One former student died; five otherpeople were injured.•Jan. 8, 2011 Tucson, Arizona: Rep. Gabrielle Giffords was shot in an assassination attempt. At least 17 others are shot by a gunman, who opened fireduring a constituent meeting outside a local grocery store. Six people were fatally wounded, including US District Court Judge and a young girl.The “other side” of the rally
16Continued (unfortunately)• May 10, 2011 in San Jose, California: Three people were killed in a parking garage at San Jose State University. Two former students were founddead on the fifth floor of the garage and a third, the suspected shooter, died later at the hospital.• Dec. 8, 2011 in Blacksburg, Virginia: A Virginia Tech police officer was shot and killed by a 22-year-old student of Radford University. The shootingtook place in a parking lot on Virginia Techs campus.• Feb. 10, 2012 in Walpole, New Hampshire: A 14-year-old student shot himself in front of 70 fellow students.• Feb. 27, 2012 in Chardon, Ohio: At Chardon High School, a former classmate opened fire, killing three students and injuring six. Arrested shortlyafter the incident, the shooter said that he randomly picked students.• March 6, 2012 in Jacksonville, Florida: A 28-year-old teacher at Episcopal High School returned to the campus after being fired from his job and shotand killed the headmistress with an assault rifle.• April 2, 2012 in Oakland, California: A 43-year-old former student at Oikos University, a Christian school populated by mostly Korean and Korean-Americans, opened fire on the campus, killing seven people and wounding several others.• July 20, 2012 in Aurora, Colorado: During a midnight screening of the film The Dark Knight Rises, a gunman opened fire on the crowded theater. Atleast 12 people are killed and 38 others are wounded.• August 5, 2012 in Oak Creek, Wisconsin: A gunman opened fire at a Sikh temple, killing six people and wounding three. Police shot and killed thesuspect, Wade Michael Page, after the attack. Page, a neo-Nazi, served in the UD Army from 1992 to 1998.• December 14, 2012 in Newtown, Connecticut: A gunman killed 20 children and six others at the Sandy Hook Elementary School. He killed his motherat her home prior to the massacre at the school, and committed suicide after the rampage.
17Why the Debbie Downer?These were not random acts of violence; they are symptoms of a much larger and perniciousdisorder: the devolution in American social mood, a detachment from reality, an erosion of thefamily construct.History books will depict this period with the benefit of hindsight and an absence of emotion; forthe rest of us, we must figure it out as we go, in real-time, and prepare ourselves for what’s tocome.Much like the Great Depression, we are living through an era, not an event.As we’ve learned too often in our time together, there is a difference between loss and loss.So, what does this all mean, and more importantly, how can we shift this seemingly self-perpetuating course?
18There are obvious one-off suggestions—a ban on assault rifles, rigorous testing and treatment for mentalillness, more thorough child safety precautions—but through a broader lens we must understand thefundamental difference between socioeconomics—which posits that the economy drives social mood—and socionomics, which argues that social mood drives financial, economic, and political behavior.As animal spirits manipulate fund manager behavior and lead to healthy corporate balance sheets – created bythe same policies that shifted risk from one perception to another—the chasm between the stock market rallyand a legitimate economic recovery becomes increasingly apparent.Policymakers take solace as the Dow Jones Industrial Average trades at all-time highs, the housing marketseemingly bottomed, employment—or, the method in which it is measured— moves in the right direction andtaxpayers were made whole their AIG (NYSE:AIG) experiment.But questions remain that I don’t hear being discussed in many circles:How Can we Stopthe Madness?
19Were the social consequences of our policy directive considered whendecisions were made in the heat of a crisis, and what—if anything— can wedo to remedy that?If social mood dictates the price of financial assets, when will this dynamicexpress itself through the world’s largest, if not entirely free, thermometerthat is the stock market?And now that we’ve witnessed “societal acrimony” and “social unrest,” whatawaits us as the final phase of our tricky trifecta prepares for the grandfinale?I am not smart enough to provide these answers but I’m aware enough to askthe questions; for every action there is an equal and (in a leverage finance-based interwoven world) possibly larger reaction, and we would be wise torespect the unexpected.The Hard Truth
20Answers I ReallyWanna KnowAt what point does an industrialist become a robber baron?Or a savvy speculator a profiteer?At what point does success become privilege?The answers to these questions have profound implications for the future of free-market capitalism in an intertwined finance-based global economy.If calmer heads don’t prevail, the bottom line might be the least of our concerns.
2412 Cognitive Biases That Endanger Investors1. Confirmation BiasThis is a fatal flaw of trading; we tend to surround ourselves with information that validates our own point of view and dismiss input that conflicts with our reasoning (alsoknown as cognitive dissonance). This is the primary reason why we always strive to see “both sides of every trade” as the residual grist between variant views is whereeducation—and profitability—resides.2. In-Group BiasThis is a manifestation of confirmation bias, or the tendency to surround ourselves with those who share similar takes on the tape. This could pertain to our physicalenvironment or a virtual experience, such as Twitter. Not only does this provide a false sense of security in our individual viewpoints, it makes us suspicious—or angry—withoutsiders who dare to question how we feel. (See also: The Gold Scold.)3. Gambler’s FallacyOne of the most famous disclaimers in finance is that past performance is no guarantee of future results. This bias is often referred to as a “glitch” in our thinking in that itextrapolates what happened in the past to construct an idea of what will happen the future. How many of you have played roulette at a casino under the premise that astring of red increases the likelihood of a black outcome? That’s flawed thinking; the odds of red (or black, for that matter) or 48% on each independent spin.4. Post-Purchase RationalizationOne of our Ten Trading Commandments is that the definition of an investment should never be a trade gone awry. Nobody initiates market exposure expecting to losemoney, but we should never post-rationalize our risk (such as ignoring stop-losses or throwing good money after bad). We would be wise to remember that good tradersknow how to make money but great traders know how to take a loss.5. Neglecting ProbabilityHistory is littered with stretches where in hindsight we’re reminded not to confuse brains with a bull market. This bias limits our ability to properly assess risk, whether it’soverstating an unlikely event (such as buying a stock for a takeover) or understating an unlikely event (such as Y2K, the fiscal cliff, or a terrorist attack). Tail events dohappen, of course, but betting on an outlier is a long shot by its very definition.6. Observational Selection BiasThis is when we suddenly notice something we haven’t noticed before, and wrongly assume the frequency has increased (when it hasn’t). Let’s say I bought cannabisstocks as a way to play (what I perceive to be) the legalization of marijuana. All of a sudden, everywhere I look, there are more and more signs that support my thesis; thetopic is featured on 60 Minutes, it’s a hot-button issue during the election, it gained momentum in the mainstream media. While some of that may prove true, I am on thelookout for news, whether it’s conscious or not.7. Status-Quo BiasMost of us are creatures of habit in our own way; we use the same toothpaste or align with a particular smartphone device. That routine often extends to our investments inthe marketplace; we’re comfortable with the stocks (or indices) we often trade and often miss opportunities outside of that comfort zone for fear of the unknown. Changeisn’t only positive, it’s inevitable.
258. Negativity BiasLet’s face it: We live in a sensationalist society where scare tactics and negative headlines garner the most attention. If you doubt this for a minute, turn onyour local news tonight. Scientists theorize that we perceive negative news to be more important than positive news. The risk—for the bears and forhumans as a whole—is the tendency to dwell on bad news rather than embrace good news, and there’s the added twist that the stock market is widelyconsidered to be a leading indicator.9. Bandwagon EffectHow prevalent is this when it comes to the financial markets? They teach it in college as a stylistic approach (momentum investing)! Nobody in ourbusiness—or in the media—wants to miss a move in the stock market, and history is littered with bubbles and busts that demonstrate this bias in kind. Inlife, this is driven by our innate desire to “fit in and conform"; in the markets, it’s driven by two factors: fear and greed.10. Projection BiasThis is predicated on projecting our thoughts and beliefs onto others and assuming that others are wired the same way (they’re not). This can lead to "falseconsensus bias," which not only assumes that other people think like we do, but that they reach the same conclusions. In short, this creates a falseconsensus, or sense of confidence when in fact one doesn’t, or shouldn’t, exist.11. The Current Moment BiasThis is a direct descendent of the immediate gratification mindset that dominated society for many years—and some will argue that the government iscurrently operating in this mode, mortgaging our children’s standard of living to achieve short-term fixes. In short, we want to live as well as possible andpay for it at a later date (as evidenced by the level of debt and our growing deficit). The housing crisis was rooted in this bias, as is the basic concept ofleverage.12. Anchoring EffectThis tendency, also known as the relativity trap, compares a situation to a limited sub-set of information; it’s when we focus on a number or value andextrapolate it to a current situation. This often manifests in the marketplace through the fundamental metric, when we observe that a stock is “cheap”relative to its peers or a historical precedent (also known as a “value trap”).Cognitive Biases