Uncertainty in the presence of vivid hopes and fears, is painful but must be endured if we wish to live without the comfort of supporting fairy tales. - Bertrand Russell You would think that in the hard-nosed world of trading, the only concepts that are applicable would be reason, logic and discipline. The current buzzword of economic rationalism implies that rational thought is brought to bear on problems. The power of the desktop computer has been harnessed to allow people access to the findings of quantitative analysis. Mind you, this didn’t help Long Term Capital Management whose Nobel Prize winning board almost sent the entire financial world tits up! Despite these advances, superstition is alive and well in the financial markets, as it is in every area of human endevour. Unfortunately though this blanket statement adds nothing to the vital arsenal of self-understanding that is required of all traders. The need for certainty is a compelling drive in people. At any one time, and more so during a time of crisis, everyone wants to know what the future holds. More often than not it is probably just to see if they’ll make it through this particular day, week, month or year. Traders are no different. We exist in a world of uncertainty. Each moment is different from the next and despite our best endeavours, we do not know what the next day will hold. It is impossible for us to predict where markets will go or where our particular instrument will be tomorrow or the next day. Dr Trevor Case from Macquarie University, who undertook postdoctoral research into superstitious beliefs, has proposed that irrational beliefs are derived from two key points. The first of these beliefs is the need to provide certainty in an uncertain world. As an example, he cites the case of the Tobriand Islanders. Researchers found that tasks that were safe, well practiced and reliable, had no mythology attached to them. Such a task may be fishing in a sheltered lagoon. A practice such as fishing in the open ocean, which was much more uncertain, had a great number of magic rituals attached to it. The relevance of this to traders is obvious. Consider that as a trader, you have two tasks to perform. The first is simply to go down the ATM and withdraw money. The second is to actively trade the futures market. In the first task you know with absolute certainty the range of all possible outcomes. You have undertaken the task of using an ATM hundreds of times in the past. In effect you are over-skilled at using this particular technology. As such there is no uncertainty in the task. Compare this to trading the futures market. This is a task where uncertainty is the driving force. As traders we are drawn to the uncertainty. There is not one possible outcome but a wide variety, not one of which do we have control over. As a consequence traders will be naturally predisposed to any methodology that offers the comfort of telling you what the future will be. Herein lies the true power of prediction and superstition as a seductive methodology. It attempts to convince you that you can exert control over a dynamic situation. With this sort of methodology, not only can you predict the future, but you can also have control over it. Such a belief system is a comfort factor in attempting to wrestle control back from events over which you have no control. This is a natural human tendency. If you doubt the desire of people to know the future, consider the growth in recent years in astrology, tarot card reading and psychic hot lines. Traders are no different in possessing these very human weaknesses. The second reason traders fall prey to superstition, is the absence of critical judgment. Traders are largely a gullible population. This gullibility is largely enhanced by the lack of critical review in much of the semi professional material to which people are exposed. As PT Barnum, the great circus entrepreneur, once stated, “You will never go broke underestimating the intelligence of the general public”. This apparently is a maxim that broadcast television and politicians have survived on for generations. You don’t have to look far for advertisements promising you riches on the market for the low price of $19.95. If you doubt the gullibility of people where money, or rather the promise of easy money, is concerned, consider an advertising campaign by the Australian Securities and Investments Commission that set out to educate people as to the dangers of a variety of get-rich schemes. The method that ASIC took was to offer a variety of schemes in daily papers. Each scheme was seemingly more outrageous than the next in its promise of a return. Ever tried Geep farming (a geep is a cross between a goat and a sheep), or blue bottle farming, or perhaps a house and land package near an airport that enabled you to charge any aircraft flying over your house a fee. One would have suspected that people would have possessed sufficient critical judgment to see through the rather wry sense of humour possessed by our peak corporate watchdog. Unfortunately this was not the case. They received in excess of 700 inquiries as to where people could acquire a geep, or when they could begin to charge Qantas for flying over their house. Extraordinary claims require extraordinary proof, and in this instance, the proof simply does not exist. Traders should, as a matter of course, dismiss everything that is told to them. The basic starting point for all traders when they are confronted by outrageous claims should be to request proof, not anecdotes. As a trader you should embrace the uncertainty that trading brings, because it is this uncertainty that offers the chance for profit. Chris T.