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Yves Smith “On Traders Behaving Badly and Cognitive Bias”

“So here is my theory: the details [of market manipulation by funds] are not specific enough for the public to see it as real. And if they can’t formulate a picture, they can’t believe it happens all that often … That is an example of a cognitive bias called the availability heuristic. If we can have examples, the more concrete the better, the more likely we are to believe that a phenomenon is valid (that is why anecdotal evidence is more persuasive than it ought to be).”

http://www.nakedcapitalis…-cognitive.html

Yves Smith of Naked Capitalism is doing “the Lord’s work” and asking for traders who have specifics on the various market manipulations shady trading behaviors perpetrated by Wall St. funds, banks, etc. to come forward and blow the whistle. The timing of her request is somewhat an effect of Jon Stewart’s recent battle with Cramer (See the more recent appearance and discussion from Jon Stewart vs Jim Cramer or the original Stewart spat against CNBC that started it all), which made very public an interview Cramer had done back in 2007 where he talks frankly (and yet not specifically enough as Smith points out below) about how funds would manipulate markets for profit.

Very interesting stuff, and since we’ve seen no successful persecution of this behavior, I have little reason to believe that future regulations will stop it. What does that mean? It means that investing in the markets is an incredibly risky business for laypeople as you are unavoidably swimming with the sharks.

The Jim Cramer chatter precipitated by his Daily Show appearance included some links to an infamous interview Cramer gave in 2007, where he discussed how he would, as a hedge fund manager, push the prices of stocks he was short down via the futures market. It was arguably a public admission of market manipulation.

What was most striking about this incident was how quickly it was forgotten.

Now, of course, one can cynically say, that’s what traders do. And there have been times when I’ve had the vast misfortune to be watching the ticks (I hate trading, I put on very few trades, and I sweat them all and second guess myself hugely) and have seen more than once some end of day action that was clearly tape painting (and my pro investor buddies saw it the same way).

But nobody seems offended at the notion that the markets aren’t safe for mere mortals, just the sharks, even the whole US investing mythology touts how transparent, open, and well policed US securities markets are.

That’s one level of heinousness.

As long as banks are playing with other people’s money, and the higher ups have plausible deniability, they have no incentive to rein this stuff in, save maybe a token case here and there so they can pretend they really were on top of things. And I’m being charitable and assuming the higher ups were not actively enabling it.

So why isn’t there more understanding of and outrage about this? After all, this is the heart of the looting that went on. If firms will tolerate (or even encourage) overly aggressive behavior that appears to generate profit, it isn’t just the nominal miscreants that are at fault, but the whole chain of command all the way to the top (after all, just as in the Jett case, they profited and therefore had reason not to probe too hard).

So here is my theory: the details are not specific enough for the public to see it as real. And if they can’t formulate a picture, they can’t believe it happens all that often (after all, if it did, surely it would be in the Wall Street Journal).

That is an example of a cognitive bias called the availability heuristic. If we can have examples, the more concrete the better, the more likely we are to believe that a phenomenon is valid (that is why anecdotal evidence is more persuasive than it ought to be).

Go back and look at the Cramer tape. It’s actually brilliant. He is not very specific! There is no “when I was short X stock in 2004, I did F, T, and H and the price fell by $Z and I made $100,000 in two days.” It’s all murky, to the point where Henry Blodgett, in parsing the transcript, had to insert words at quite a few junctures to make what Cramer say make sense to him (and note I in reading the transcript would have inserted different words). That’s why this incident never really stuck to Cramer. It all came off like knowing innuendo, but he didn’t present a smoking gun.

So unless we have a Pecora commission, or a lot of ex-traders and trading managers coming forth with particulars, the great unwashed public is not going to know enough of what happened to know where to direct its diffuse but well warranted anger over having been had.

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