BoundedRationality_TheAdaptiveToolbox.pdf

Is There Evidence for an Adaptive Toolbox? 87
Long-term studies concerned with simple investment heuristics for asset
markets have produced no clear evidence for the superiority of one heuristic
over the other. Most of the research concerned with the question "Can an expert
beat the market?" has concluded that the answer is: "In general, no." None of the
many heuristics known to be used by traders (including anything from simple
"technical" rules to astrology) results in long-term, above average performance.
Several reasons have been put forward to explain why so many different
heuristics coexist, i.e., are proposed, paid for, and actually used by traders on financial
asset markets (see, e.g., Bromann et al. 1997).
One possible explanation is the difficulty in learning from feedback from a
highly complicated decision situation. Making the right inferences from complex
multicausal feedback is difficult. Diffuse reinforcement can quickly lead to
the construction of inadequate and/or complicated heuristics. These heuristics
might survive, in much the same way superstitions survive, through false correlation
and biased attributions of success and failure (see, e.g., the phenomenon
of "illusory correlation" described in Fiedler et al. 1993).
A second explanation of why inadequate heuristics sometimes govern the decisions
of traders is that having a rule to follow makes traders "feel better" than
having no systematic approach at all. This may also be the reason why gamblers
often use a "system" for gambling. The demand for superstition-based decision
support is huge and the number of publications on the topic is an indicator of the
extent to which such heuristics are used.
A third conceivable reason why inadequate heuristics survive is that many of
the technical analytic devices which provide asset market traders with decision
support are closely related. The similarity between the devices in combination
with widespread usage can cause substantial correlated action. These actions,
i.e., simultaneous buy or sell offers on a certain cue, lead to self-induced market
movements. Since the movements typically match the heuristics that produced
them in the first place, a self-fulfilling cycle can be sustained.
That so many different heuristics coexist also supports the basic finding that
none of the simple rules used in financial asset markets is truly superior to the
others — at least not in the long run. Even though learning is difficult in the context
of the diffuse feedback of such markets, it seems plausible to expect that a
truly superior heuristic would quickly spread and evolve as the dominant rule in
the environment. Since such domination is not observed, the hypothesis that no
heuristic has clear performance advantages seems well founded.
The phenomenon of false correlation and attributions appears not only in the
context of financial markets. It is much more general. It typically occurs in those
situations in which the feedback on actions is multicausal, complex, and partially
random. Anthropologists report that many superstitious beliefs have survived
over multiple generations under such feedback circumstances. The
example of the superstitious rituals followed before and during a sports competition
by many athletes and onlookers suggests that this phenomenon is far from
obsolete in modern human society.