Levels of Reasoning on the Reasoning of OthersHere is another chart, giving Money Man’s view on the market, followed by some constructive escapism or another set of glasses to try on.
Money Man has stretched some indoctrinated traders who read these posts quite far and here he is going even further. He is aware of the negative ‘modern’ view on metaphors. Is it not strange that this is exactly how many profound things have been stated in the past, for good reason, but now it is passé?
Here he asks you to see the chart as art and mathematics as a tool to quantify and rationalize, looking for intent. Art, because of the emotions of fear and greed expressed on the chart. There is a second level to the chart that puts things in perspective a bit like composition of great paintings and architecture relies on the Fibonacci sequence. Surely there is an element of self-fulfilling prophecy in Fibonacci levels, but the point here is about a second level expressing measurability, reason, and illusive intention. A PS is added as an expansion on this idea.
People tend to consume what is in front of them in an ‘at face value’ way. Few looks deeper for finding the story hidden in between the setup of a noisy ‘story line’. Money Man touched on this in the ed post “Sandwiches and Lollies” and there is more on this in “Reading the Markets”.
A great illustration and measurement of levels of effort and thinking, is the thought experiment done in game theory introduction classes. Do not be intimidated by game theory (why will be explained later and you definitely do not need to be a Von Neumann to trade) but knowing your trading instrument of choice will allow you to get more out of it. This idea is of even more value if you trade an instrument with a fickle relationship with another, like BTC to the economy and politics, BTC to ETH and BTC combined with ETH to alts, etc. Money Man had to scour the net to find what he read long ago. It made enough of an impact on him that it changed his view on trading, traders, and life.
It goes something like this: Guess the average number that is half of the average number guessed by the other participants in the experiment. The numbers to choose from for all participants are 0 to 100. This is obviously a question to teach a principal and thus needs you to think deeper.
Think about it and soon you will realize that the average should not be over 50 and that results in an answer of 25, but what then, what about the other participants who figured that out as well and then affects the answer with their answers? The answer, after many participants were surveyed, was around 12. Let us say that the realization that 25 is the rational answer if nobody thinks about how others would think – is level 1. Level 2 would then be considering that others will think about the thinking of others and cause 12 to be the answer. Obviously, this can go on and on till close to zero. Have a look on the net for “Planet Money Here’s The Winner In Our Pick-A-Number”. And so, you could end up reading on the net about the “Keynesian beauty contest”, etc.
Do not let the game theory confuse you. Money Man believes that type of thinking is already baked into the market (please read “Hive Mind v Irrational Markets), but the principal that made him remember it while regretfully forgetting where he was first introduced to it, is that the majority of people with their thinking caps on (knowing there is a catch to the question), perceives the average game “opponent” to think or make an effort to level 1 – reasoning that themselves going one step further is the answer. It is not the levels of reasoning that made him remember this, but the level of planning of a typical trader to that of the successful traders. Successful traders reason to the next level / make an effort to calculate and consider further. Money Man believes that the chart, minus the noise, gives a reasonable array of outcomes to consider and be proactive on. Proactive traders are not devoid of emotion, only keep their emotions away from their trading.
Conclusion: Traders are often accused of gambling. Planning changes things from gambling to a learning journey and ultimately into the realization of an edge. You do not have to be a mathematician to trade as much as (Money Man knows that he has said it too many times but allow him to once more) you need to be a planner, accepting results before they materialize.
PS I am sure that most who had to sit through art or literature classes had the experience I had. I remember sitting in class, watching a Star Trek episode (not Shakespeare as I think the teacher would have seen that as too anticipated). He, as teachers do, had his lesson planned to make it a teachable moment. After watching it he asked seemingly irrelevant questions about the characters and the characteristics of this and that, etc. He wrote it on the blackboard and there it appeared: a second level, a story within the story, enriching the story.
Could a Star Trek episode be art? Money Man thinks so as he sees art as intent expressed through effort, not necessarily effortless. The difference between art and randomness lies in intent. A way to find if intent is present is to measure. Get your measurement to resonate with the market. How? Step one: Start measuring what resembles consistency – the basis of what Money Man is attempting to provide with his charts.
There is measured intent all around us. Money Man is not claiming to be an expert and he is not trying to sound cooky or like a clever fool. Rolling ideas around in your head could break walls in there that you did not realize you had.
