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Something to Pondor: Baseball’s Behavioral Experiment

Great article from Brian Costa of the WSJ:

Take a peek inside the frazzled mind of a major-league hitter these days. It isn’t a pretty sight.

Pitchers are throwing harder than ever. Batters are striking out more often than ever. And their judgment is getting shakier: Hitters are chasing more pitches outside the strike zone.

It is enough to make some teams wonder: What if we could just rewire hitters’ brains to react to pitches better? As it turns out, at least three major-league teams are engaged in a covert science experiment to find out.

Several years ago, the Boston Red Sox began working with a Massachusetts neuroscience company called NeuroScouting. The objective was to develop software that could improve hitters’ ability to recognize pitch types and decide, with greater speed and accuracy, whether they should swing. The result was a series of no-frills video games that became a required part of hitters’ pregame routines in the minor leagues.

When Theo Epstein left his job as general manager of the Red Sox to become president of baseball operations for the Chicago Cubs in 2011, he brought the same methods to Chicago’s farm system. And last year, the Tampa Bay Rays made the neurological training games mandatory for minor leaguers—threatening to fine those that didn’t complete their assignments.

Now, a startup company with a near-identical name says it is in talks with four other major-league teams about providing tests to evaluate the neurological strengths and weaknesses of their minor-league hitters. The company, Neuroscout, would put electrode caps on players to measure their relevant brain activity during computer simulations of pitches coming at them.

Red Sox general manager Ben Cherington said the idea is to improve the connection in hitters’ brains between the visual stimulus of a pitch and the decision of whether to swing. “There’s a connection there,” he said. “And if you’re trying to hit a baseball moving at 90 miles per hour and moving in different directions, it probably helps for that connection to be strong.”

Though NeuroScouting’s games vary, most of them depict a ball coming from the pitcher’s mound toward the hitter. Using a laptop or tablet, players are given instructions such as, “Hit the space bar when you see the seams on the ball spinning vertically,” and are scored based on their reaction time and accuracy. The Rays have a leaderboard that shows players which of their teammates fared best on a given drill, like the high-scores screen at the end of an arcade game.

NeuroScouting executives declined to go into detail about their methods or their clients, citing teams’ demand for confidentiality. But Wesley Clapp, one of the company’s co-founders, said their software can identify how well each player’s brain reacts to specific pitch types—an outside curveball or a low fastball, for instance—and tailor their training to the areas where they need to improve the most.

“The best players have the best neural skills,” Clapp said. “It’s like a dimmer switch. The more you turn that dimmer up, you see more and more impact on the field.”

The need for hitters to react faster is clear. The average major-league fastball this year is 91.8 mph, according to the statistics website FanGraphs, a figure that has steadily increased from 89.9 in 2002. Hitters’ decision-making is slumping, too. They have swung at 30% of pitches outside the strike zone this season, according to pitch-tracking data, up from 27.9% in 2009.

But players are divided on the benefits of brain games that, for many, feel more like homework than baseball.

“For the most part, guys just seem like, every other day, ‘Ugh, I have to do this again,’ ” Rays outfielder Kevin Kiermaier said. “You try to get in a routine, and it’s like, ‘Oh, you have to do neuroscience or you’re going to get fined.’ ” He said that fines for players who skipped their assigned videogames were in the $25 to $50 range. Rays general manager Andrew Friedman declined to comment.

In the majors, where players have more autonomy, few choose to continue with the games. “People didn’t have that stuff 10 years ago. People could still hit,” Rays outfielder Wil Myers said. “Don’t try to reinvent the game.”

Nonetheless, teams’ interest in the neuroscience of hitting is only growing. What began as a training tool for the Red Sox has also become a scouting device. Before each amateur draft, the Red Sox assess hitting prospects in part based on how well they score on the NeuroScouting games.

Mookie Betts, Boston’s fifth-round draft pick in 2011, recalled meeting with a Red Sox scout in an empty classroom one day during his lunch period at a Tennessee high school. At the scout’s request, he completed a series of games on a laptop. “I was thinking, ‘What does this have to do with baseball?’ ” Betts said. “I guess I did pretty well, since he kept on pursuing me.”

Betts, 21, said the daily NeuroScouting drills he did in the minors helped put him on a fast track to the majors. “It gets your brain going,” he said. In 43 games through Thursday, his .363 on-base percentage ranked second among major-league rookies behind Chicago White Sox star Jose Abreu.

Teams still aren’t sure if any of this will boost their offense. The Red Sox have seen hitters such as Betts rate well on the neuro tests and blossom into productive players. But Cherington said other prospects have scored well and not panned out.

Likewise, Rays catcher Curt Casali said his hitting improved after the team introduced NeuroScouting while he was still in the minors last year, but has no idea if one had anything to do with the other. “You could just be a really good hitter,” Casali said.

The only thing teams know for sure is offense continues to fall. The major-league batting average is .251, which would be the lowest for a single season since 1972, the year before the American League introduced the designated hitter. The leaguewide strikeout total is on pace to reach an all-time high for the seventh consecutive year.

At this point, they don’t need to know an experiment will work. The fact that it might is enough. “Intuitively, it would make sense that this would be a helpful tool,” Cherington said, “but I just don’t know if anyone yet can prove that it’s predictive. The hope is maybe it can be.”

This type of “psych” article is exactly why I pursue so many behavioral experts for my podcast.

Further related Podcasts and Articles from the Trend Following Blog:

Shane Snow Podcast

Thinking to make a living

PhD not required to win at trading

John W Henry

Trend Trading without Charts

Pro Football vs Pro Baseball

Wall Street Gurus Know Investor Brains Are Gullible & Easy to Manipulate

From MarketWatch:

“…the brains of Wall Street gurus and brains of Main Street investors are in a symbiotic relationship, a “dance of death.” Wall Street gurus know the investor’s brain is gullible, easy to manipulate, will ignore facts, historical data, rational judgment, anything to to stay optimistic, even when a crash is imminent, obvious, even in progress. It’s in our DNA, our brains, it’s our nature. Yes, American investors are born optimists. So are Wall Street gurus. Years ago we did a little research study. Turns out that 93% of time Wall Street is bullish. And today, from what we see in the field of behavioral economics, it’s also true that the brains of America’s 95 million investors are also 93% optimistic. Get it? Americans are inherently optimistic, blind optimists. We dismiss facts, block reality, deny history, crashes, meltdowns. Wall Street gurus do it. Main Street’s 95 million investors buy the spin. We secretly want to be deceived. Even in real bad times, deep inside we trust in a better future, want the good news, optimism, happy talk, bull markets. We desperately want to forget the harsh reality of the past. So we deny stuff. Wall Street knows this too. So they profile you. Yes, they know you’re a sucker for happy talk. Warning: This symbiotic relationship is doomed to repeat, forever. And the bubbles will get bigger, we’ll have another, bigger meltdown, even another Great Depression. So expect Wall Street (and their Washington buddies) to just keep feeding sound bites to the media to manipulate the brains of Main Street’s investors. It’s in their DNA. It’s in your brains to trust.

The only proven strategy to profit from that is trend following.

“This is my retirement money. I can’t afford to be out of the market anymore!”

John Hussman writes about investors with no plan who buy at the top, panic, sell, and get killed:

“This is my retirement money. I can’t afford to be out of the market anymore!”

“I don’t care about the price, just Get Me In!!”

“It’s a healthy correction”

“See, it’s already coming back, better buy more before the new highs”

“Alright, a retest. Add to the position – buy the dip”

“What a great move! Am I a genius or what?”

“Uh oh, another selloff. Well, we’re probably close to a bottom”

“New low? What’s going on?!!”

“Alright, it’s too late to sell here, I’ll get out on the next rally”

“Hey!! It’s coming back. Glad that’s over!”

“Another new low. But how much lower can it go?”

“No, really, how much lower can it go?”

“Good Grief! How much lower can it go?!?”

“There’s no way I’ll ever make this back!”

“This is my retirement money. I can’t afford to be in the market anymore!”

“I don’t care about the price, just Get Me Out!!”

Obviously, he is not a price based trend following trader, but his understanding of trading psychology dovetails nicely with trend following.

Dave Ramsey, Rick Edelman & the Anal Probing of Investors

A reader writes:

Hey Mike. Davie [name] Here. You know Mike, there is something that I keep hearing from two of the most prominent financial advisers in the country and it drives me crazy every time I hear it. I can’t understand how two men who are obvious very intelligent and gifted can be so ignorant of the truth. The two men are Dave Ramsey, and Rick Edelman. I have heard them both on more than one occasion in which they were promoting their buy and hold philosophies that there are no “market timers in the forbes 400 wealthiest list”. Then they go on they point out that “however, the number 2 guy on the list, Warren Buffet is a long term buy and hold guy”. This just drives me crazy Mike because it simply isn’t true and two men who are “experts” in money ought to know better. Sure there is one guy who claims to be a buy and holder on the list named Warren Buffet though as you have pointed out, he really may not have built the bulk of that wealth through classic buy and hold strategies. But that’s beside the point. The point is that of course there are many many more than that one guy who are on that same list who are indeed market timers which is just a fancy word for trader. What is it with Ramsey and Edelman Mike? Have they not heard of George Soros, or Ray Dalio, or T Boone Pickens, Stevie Cohen, James Simons, Paul Tudor Jones, Stephen Feinberg, Bruce Kovner, Eddie Lampert, David Shaw, Louis Bacon, Jeffrey Gendell, Stephen Mandel, Israel Englander, Richard Perry, David Tepper, Stanley Drunkenmiller, William Von Mueffling, John Arnold, John Paulson, or Julian Robertson??? I could go on. All of these guys to my knowledge are billionaires whose net worth is high enough to be qualify for the Forbes 400 list. And that’s not to mention the hoards of “market timers” who may not be wealthy enough to be on the list but certainly are among the top one tenth of one percent of the world wealthiest individuals. Men such as Boaz Weinstein, or Bill Dunn. You know Mike, I can name a heck of a lot more super wealthy “market timers” than I can long term buy and holders. The only super wealthy buy and holders I can name are Warren Buffet and Peter Lynch. It really annoys me that Dave Ramsey and Rick Edelman continue to claim that no one can make any money by trading. It simply isn’t true. I was the guy who sent you the article from yahoo news about the guy who lost in faith in the market. If you read that article, you would have noticed that near the end of the article, they pointed out that the man they highlighted in the article had lost about 90% of his money and only had $800K left. Unbelievable Mike! You talk about taking a 50% draw down with buy and hold! This guy was a multimillionaire with about $8 million in his retirement account, and his buy and hold strategy combined with obvious additional poor choices resulted in him losing about $7.2 million dollars! Meanwhile, these “market timers” I mentioned above had their net worths rise and rise and rise through the past few years. I know this because, I remember reading about many of them in trader monthly magazine back in 2006 and many of them had not even accumulated a billion dollar net worth by then and now most of them are multi billionaires. I really wish Ramsey and Edelman would educate themselves more on this issue before they speak. There! I’m done ranting! I love ya man!

Thanks Davie, but Ramsey and Edelman do what they do on purpose. Very much on purpose. It’s up to everyone out there to figure out their motivations for misleading. Hints for their “why” can be found here: Dave Ramsey 5 foundations.

An Investor Checklist

Barry Ritholtz offers an investor checklist of the most common errors investors make:

1. High Fees Are A Drag on Returns
2. Mutual Fund Are Inferior to ETFs
3. Reaching for Yield is Extremely Dangerous
4. Asset Allocation Decisions matter more than stock selection
5. Passive is usually better than Active Management
6. You must understand “The Long Cycle”
7. Behavioral Issues Are Costly
8. Cognitive Errors as well
9. Understand your own risk tolerance
10. Pay Guys Like Me For the Right Reason

White Ritholtz was clearly not writing with only the trend following trader in mind, many of these are spot on for trend following.

“Speculation is Evil… You Greedy Bastard Covel!”

Alexander Ineichen writes:

“The financial crisis was not ’caused’ by a single event or a single group of investors. More likely, a series of conditions needed to be met for the dominos to fall one by one and the system to crack. The idea that hedge funds were the first stone to fall and thereby causing the chain reaction, seems infinitely improbable from what we know today. However, a disproportionate amount of regulatory zeal and political energy is spent on regulating ‘alternative’ funds. This we find odd, especially given that the ‘too big to fail’ issue is the single most important aspect related to systemic risk and is far from being resolved.”

He adds:

“Politicians blamed speculators for ‘causing’ oil to go to $147. However, politicians didn’t thank speculators for ‘causing’ oil going back to $35. This seems odd. In the Greece situation, it’s again the speculators who get blamed. Bismarck often remarked that if one likes laws and sausages it is best not to see them being made. This is probably also true for the price mechanism in a free market economy, as the impact of the market responding to bad news isn’t always pretty.”

Ineichen stop being so right.

Jim Rohrbach: Why Investors Buy High and Sell Low

My friend Jim Rohrbach sent me an article he recently authored:

I talk to a lot of people about investing. Many of them are afraid to invest. I don’t think they recognize their fears, but the longer they talk the more I recognize the fears that are not obvious to them. I had a few of those conversations this week. One was from an existing subscriber and one was from  a potential subscriber who has called me on several occasions. At the end on each of the calls from the potential subscriber he tells me that he understands the importance of my service, and that he is going to subscribe. But, he never does. The other conversation is with a current subscriber who did not get in the market even though he knows that the RIX has been on Buy Signals for almost all of the time since the March 9 lows.

What are the common threads in these  conversations? Well the same ideas apply to most investors who can’t pull the trigger on up trends and down trends. When the markets hit their lows in early March, all we heard was that the markets were going much lower and we were going into a depression like the one that happened in the 1930’s. So that creates the fear that “if I get in now the market will go down, so I will wait so I don’t lose money”. It doesn’t matter to these people that the trend of the market turns up. They are afraid of losing money, so they stay on the sidelines.

Another fear happens when the trend of the market starts down. Many investor want to keep their recent profits. They are sure that the markets will go back to their recent highs so they stay too long because they are convinced that “if I sell now the market will turn around and go back up”. So they stay and stay until their losses get so big that they make the decision to ride it out. In bear markets, fortunes are lost waiting for the market to go back up.

Another fear occurs when the market continues up. Those who did not get in are afraid to get in because they are sure that if they get in, the market will turn down and they will lose money. So they wait for a pullback, that may not come. If the big pullback does come, these same people will become afraid again and will not get in even though they are given a second chance. Fear controls their decisions, so they can’t make a move. They eventually join the “Buy and Hold Crowd” and ride out all market up and down moves. They become “Sitting Bulls”.

If investors base their investment decisions on emotions and fears, they will probably be unsuccessful. When investors decide in advance where they think the market, or their investment vehicle, is going to go they will tend to look for indicators to support that decision. They have a strong need to be correct even while their financial world is collapsing.

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