The Madame Bovary Effect
November 4, 2018·4 comments·In Brief
Extended periods of market inactivity don't produce patience. They produce action, often terrible action. Talented investors and traders begin making outsized bets on ordinary opportunities simply because they can't tolerate the boredom of waiting. The compulsion to "do something" overrides the discipline that separated them from mediocrity in the first place.
• Boredom is as powerful a market force as greed or fear, but we don't talk about it. Most market analysis focuses on what people want (profit) or what they fear (loss). What's overlooked is what they cannot endure: the psychological weight of inactivity. A long string of low-conviction opportunities doesn't build discipline. It builds desperation.
• Talented people systematically overestimate ordinary opportunities after forced inactivity. The best investors and traders succeed not because they make brilliant calls constantly, but because they can sit on their hands through boring stretches. Once that boredom becomes unbearable, they reverse course and turn a marginal edge into a conviction bet they shouldn't be making.
• Market participants will migrate toward anything that isn't boring, even if it's riskier or less understood. Bitcoin flatlined for months. Boredom didn't breed patience. Instead, players shifted toward more volatile cryptocurrencies, cannabis stocks, or other hot spots. The destination doesn't matter as much as the escape from monotony.
• This creates a structural problem for business models dependent on sustained attention. If your competitive advantage requires players to stay engaged, you're vulnerable the moment the game becomes dull. The hot-dot businesses die when the hot dot stops being hot. But this same environment creates opportunity for other players.
• The real question isn't what will happen next in any particular market. It's which business models are built to survive boring periods and which ones require constant action to stay alive. Everything Hunt describes about crypto applies everywhere attention-dependent markets exist. The difference between thriving and disappearing may depend entirely on whether you can tolerate what market participants cannot.
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Comments
The problem, of course, when you are managing money for others is the “Why should I be paying you x% per annum to sit in cash?” question you will inevitably get from your clients. Even if you as a money manager can tolerate the boredom, most likely your clients can’t and they will shift their assets to another manager who is excited about some (any) investment opportunity.
Patience is the word we’re looking for and it is indeed a virtue. When I look back at my investing career, everything you write in this essay rings absolutely true. The best results I ever had were back in the late 80’s when I was trading futures.
I was farming full time and only had a few hours a week to devote to the markets. I would take a position and hold it for months. No access to instant real time quotes then, so no temptation to trade every little gyration in price. I sold the farm years ago and have plenty of time for the markets and real time prices in front of me all day and night. But all I have to show is mediocrity at best. There is just a huge temptation to have to do something, even if it is the wrong thing. Thanks Ben, for pointing out a problem that nobody ever discusses.
Reading the above, all I could think about was Mike McDermott and Joey Knish. https://www.youtube.com/watch?v=WtYbZbdIIcI
…and I just now realize that the previous article quoted was called “Rounders”.
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