Perceptions of Time
It takes about 130 milliseconds for a sprinters brain to detect and process a signal and translate that signal into action that results in them leaving the starters block. Wait for it…..
It takes 400 milliseconds or more for the sprinter to become consciously aware that the starters gun has been fired.
In the 1960’s neuro-physiologist Benjamin Libet discovered that the brain has a way of reordering the way it processes time and the continuous experience of hearing a gun shot and then sprinting is all an illusion.
A couple of weeks ago I was trying to change a globe from a high ceiling. I climbed up on a high chair that was a precariously positioned, the ladder was right there but I knew better, and of course the inevitable happened the chair tippled and I fell awkwardly backwards from a fairly high position onto a concrete floor. Something happened to me while I was falling (no bones broken but pretty close), I am sure many of you have experienced this.
Time moved slowly, I could see everything happening in slow motion. There is a lot of literature on this phenomenon how it is possible to manipulate the way we process internal time.
So what am I trying to say?
There has been a lot of discussion lately at the disconnect between the price action of the markets and the economic reality that we are observing via news headlines and government statistic releases.
Let me start by saying that the markets are conditioned to react to stimuli not necessarily reality. We have seen how sprinters react first and think later. The same applies to traders we react first and think later. In most cases we are not aware that the thinking we apply is an illusion and is largely driven by our experiences and training through our life with their inherent biases.
Reed Hastings the CEO of Netflix has an interesting management philosophy when dealing with managers who are in conflict at work. He gets them to have a public debate with their peers, but the twist is he gets them to argue their opponents view.
In summary if you make quick trading decisions you should realize that you are not really thinking about it but acting mechanically based on your past. Make sure that you have exposed your thinking to opposing views or impartial participants like computer based backtesting or monte carlo processes.
I want to end with a chart that displays a massive illusion of the wealth effect.
I have been droning on for months how there is no such thing as a free lunch or more precisely the art of alchemy as practiced by central banks is an illusion.
In the chart above I have measured the relative performance of the S&P 500 against Gold which today is still the only real stable measure of money as it cannot be created at the will of a central banks printer or computer.
What you see is that the Real S&P 500 topped in 2000 some 5,252 days ago and that the value of the S&P 500 as measured in today’s money is down 70%.
The markets eventually reflect reality, it is only a matter of time.