Behavioral New World
October 1, 2023
Jesus’ face on a piece of toast? And elsewhere![1]
Have you ever lounged on the grass on a balmy summer’s day, looked up at the sky, and seen the image of Lady Gaga somewhere in the billowy clouds? If not her, what about a laughing hyena? George Washington? Scooby-Doo? If so, congratulations: you’re good at pattern recognition!
Let’s try to put that skill to a more practical use. The chart below shows the stock price of global conglomerate John Galt & Co. over the past decade. Do the data points seem random, or can you perceive something more interesting? A long-term trend with a seemingly inevitable rebound? A double-peaked mountain in the early years? A gulch, perhaps? A declining trend with regular spikes upward?
If you do, you are like many people who have observed this chart and seen patterns in the form of continuations, reversals, or seemingly predictable undulations. You might also identify other regularities. For example, in some cases (not necessarily in the chart below), it might seem that it goes up on the third day after a stock has gone down two days in a row.
John Galt & Co.
Years > > >
Now it is confession time. The chart above of “John Galt & Co.” stock is not an actual stock price chart. Instead, I created it by using a random number generator. The initial price was pegged at $200 and then a random component (number) just added on. “Random” means that the choice of the next number in the sequence does not depend on the number just chosen. In spite of its random nature, this process generated the seemingly non-random price chart you see, complete with a “pattern” or two at least.
Humans naturally seek out patterns and trends because this ability has been honed by evolution. A pattern-detecting bias is virtually embedded in our genes, and it has been key to our survival. For example, there are many cycles in nature, ones that are regular and often predictable. The person who knew the pattern of the seasons with some level of certainty was better able to predict when migrating herds would pass nearby, allowing them to take advantage of this knowledge. As agriculture developed, the person who identified the seasons accurately was better able to time the planting of crops. Thus, people with the ability to detect patterns were more likely to survive, reproduce, and pass along that skill to their offspring.
It is clearly a human trait to look for patterns and regularities, and it may have saved us as a species. The trick, though, for us modern humans, is to figure out when we are observing real patterns and when we are interpreting nonpatterns as patterns. Unfortunately, the latter happens way too often, even to many of us who are highly aware of this bias. One last thing: that’s definitely Lady Gaga up there.
This newsletter draws from Chapter 4 of my book, The Foolish Corner, available on Amazon. You may subscribe to this (monthly) newsletter at johnhowe.substack.com.
[1] And in pans, on walls, in coffee mugs. See https://www.theguardian.com/world/gallery/2011/jul/21/jesus-food-sightings
Very hard to know when if a repeating is a pattern or random, and when patterns can break. I see a lot of "pattern analysis" in the crypto asset world, without any analysis about what is causing that patter.