Action! Roll!

Martin Seligman’s experiments with dogs on learned helplessness sheds light on investor market behavior.

He had dogs in two different situations.  In one, the dog got a mild electric shock after a bell was rung, and he was able to go to a switch and turn it off, which he very soon learned to do.   The other set of dogs, got an electric shock, but had no warning bell and  way to turn it off.  When the control dog, who had control, turned off the shock, the yoked dog, who did not have control, had the shock turned off as well.  That way there was no difference in their unpleasant experience.

Then the two sets of dogs were put into a shuttle box which was a large box with a low fence between the two parts of the box.  When a small electric current was applied to the floor of the box that the control dog was in, he jumped over the fence and got away from the annoying electric shock.   When the same shock was applied to the yoked dog, he just sat in the corner and whimpered.

Hence, “learned helplessness” which became Seligman’s model for depression in people.  He has written some fascinating books, easy to find in the library, for example, Learned Optimism: How to Change Your Mind and Your Life (Amazon link where you can explore further).

How does this link to individual market behavior?

The idea comes from Dan Ariely’s book on behavioral economics, Predictably Irrational, Revised and Expanded Edition (Amazon link).  In the very last section he discusses the experiment and his take is that investors have been buffeted by the market since the dot com bust in 2000, and now the credit cycle crash in 2008 still going on, without being able to affect it and control it and so have become depressed in their economic outlook.

He even hints at the solution, but veers away from it in his further discussion.  There are three main ways to overcome “learned helplessness” in the markets.  One way is to write about what you trade and why.  Or what you invest in and the reasons behind it.  As often as you look at the market to write about what is going on to try to make sense of it.  That is the second part, to try to understand what is happening.  That is also one of the comforts of technical analysis, regardless of its effectiveness, it is a tool for understanding and predicting.  Prediction is equivalent to control.  The third part to overcoming deer-in-the-headlights syndrome is to control risk, have stops that take out your position at a predetermined loss.  Action is the best remedy.