The Squid Game Shows Why Most People Don’t Make Money Trading
Squid game is the hottest series on $Netflix (NFLX.US)$ right now, in which 456 players join a game of death, where they have a chance to win 456 Billion Korean Won (KRW), or 38.5 Milllion US Dollars.
What’s interesting about this series is that it depicts human sentiment in a very realistic way. We could see how market participants think and act by looking at the participants of the squid game.
A random guy appears at the subway station, and offers to play card flip, where he’d slap the player if he wins, and pay $100 if he loses. He actually ends up paying the players, stimulating their curiosity. Later, players are taken to a remote island where they have no clue what game they’re playing, with hopes of potentially winning life-changing money.
Beginners Luck turns to Attribution Bias
People who join the stock market are not different. They don’t know what game they’re playing, and what rules there are. Just as the subway guy invokes curiosity from the players by paying them small amounts of actual money, people are dragged into the stock market through stories of their friends and acquaintances making life-changing money by trading.
You try to remember the name of the stock or cryptocurrency your friend mentioned, and buy it without doing any due dilligence. You participate in the game of the market with 0 understanding of the game and rules.
When the stock/crypto you bought goes up (by chance), you fall into the trap of beginner’s luck. Beginner’s luck refers to a phenomenon or situation in which a beginner experiences a disproportionate ferquency of success against even experts in a certain field or activity. It’s often used in gambling and sports. But beginner’s luck leads to overconfidence and attribution bias.
Overconfidence refers to one’s excessive trust in his decisions based on gut-feeling and his cognitive abilities. This often leads to overtrading, and the market participant ends up paying excessive trading fees. Overconfident traders also tend to neglect statistics, and put all their eggs in one basket. They hardly listen to other people, and tend to choose the stocks/crypto they invest in themselves.
Attribution bias, or cognitive bias, is when people find reasons for their own and others’ behaviors. So when they’re in profit, they think that it’s all thanks to their amazing prediction. When they’re at a loss, it’s because the market was in an unfavorable situation, or simply because they were unlucky. Essentially, they constantly come up with excuses for every situation.
We all know Isaac Newton as a genius physicist, but he was a failure as an investor. He made the wrong investment decision when he invested in South Sea stocks, which led him to lose 20,000 pounds (about $4M today). He lost most of his life savings and famously said that “you can calculate the motions of heavenly stars, but not the madness of people” - a classic example of someone with attribution bias.
Mob Psychology and the Bandwagon Effect
This is accurately reflected in Squid Game. When players play ‘Red Light Green Light’, they are shocked to see other players get massacred. After the game is over, they later vote whether they want to continue playing the game or not. The surviving players fall into the trap of overconfidence and attribution bias.
Only 1 person out or 456 will survive and win the prize money. Statistically, every player has a 0.22% chance of survival. While this is statistically low, they’re taken away by the pile of cash hanging from the ceiling, and start believing that they’re special, and that they can win. Lotteries and gambling work in the same way, in which people bet on a probable case that is close to impossible. Sadly, most people approach trading like gambling.
In Squid Game, right before they play tug of war, a riot breaks out, and players are split into different factions. So when they’re told to team up for tug of war, teams are formed based on the factions that were formed the day before. This shows us mob psychology and the bandwagon effect.
Mob psychology, or mob mentaility, is when people follow the actions and behaviors of their peers when in large groups. The bandwagon effect falls within the scope of mob mentaility, and is a phenomenon in which people do something primarily because others are doing it , regardless of their own beliefs.
The same psychological phenomena can be applied to investors and traders in the market. Instead of trading based on their own trading rules, strategies, and analyses, they simply follow the actions of other market participants. These are the people who end up panic buying or selling, and falling victim to pump and dump schemes.
Conclusion
These psychological phenomena prevents us from making the right decisions in the market, and making the wrong decisions indicates that we lose money. Just like how most people in the Squid Game end up dying, there are many other people who entered the market with dreams of becoming a millionaire, only to lose everything. But unlike the Squid Game, the financial markets isn’t a winner-takes-all. If you can understand the characteristics and rules of each market, and do your due diligence on different ways to beat the market, you can have a statistical edge. As a trader, I would say that technical knowledge accounts to less than 5% of what it takes to be successful. It’s more about understanding your cognitive bias and controlling your emotions and psychological state.
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Mars shu : The one thing I never expected from trading when I started out was how much it would teach me about myself.
muchtime Mars shu : Absolutely. It's all about metacognition.
Mikalov1 muchtime : True
Spared : Newton may have suffered from an attribution bias but he was correct that you cannot calculate the madness of people. He actually said that just before he sold his South Sea stock for a 7000 pound PROFIT. He seemed to recognize what was happening. He then jumped, unfortunately, back in near the top (even geniuses fall for FOMO) and that was when he lost his 20000 pounds. People always fall for buying in at the top of manias because it's always "different this time." It's never different. The assets change but human greed combined
cooldart61 Spared : sounds like AFRM : )
rxuyEJKtVL : Well said. As a fairly new trader myself, I have seen many of my peers fall into the mental traps you described, and consistently lose money until they give up entirely. I completely agree that the fundamentals and technical knowledge is a very small part of being successful in the market - in my opinion, that is the easy part to learn. Controlling your emotions, being patient through red days, and not getting caught up in the current moment/story/etc - That is the hard part.
Brandony : Great article. As a newbie, it certainly help me understand where to focus. Thanks!
6ynM6e8ZP5 : Respect masses behavior, your opinion seems right to me, but your comment "As a trader, I would say that technical knowledge accounts to less than 5% of what it takes to be successful" seems to me wrong. Maybe you don`t know good people at technical. My opinion, there is no way to make consistently money without technical. I will change, 80% technical. My humidly opinion.
iBbiZQYX6d 6ynM6e8ZP5 : But the technical knowledge accounts for only part of what makes someone a good trader. I know several traders whose net worths are in the multi million dollar range, who don't use technical analysis at all when trading. Being good at technical analysis makes you a good technical analyst. That doesn't necessarily imply that you'll make money trading. There are different skill sets required for trading, and most of that accounts to metacognition, and understanding your psychological state and biases.
Trading Rockstar 6ynM6e8ZP5 : I can’t be able to give a weight on the value of technical. Despite the great article, the « less than 5% » seemed to me wrong too. This suggests a better explanation of what’s included and what matters most then ?
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