Monday, August 10, 2009
The head-and-shoulders illusion
The so-called "head-and-shoulders" pattern (and most of the sacred TA patterns) can be discerned with remarkable regularity in most 2-dimensional time series graphs of almost any variable with sufficiently complex and numerous dependents.
And it occurs frequently in graphical series produced by random chart generators.
And yet, even given its colossal recent failures, the venerated head-and-shoulders pattern will never die, because people want to believe in it, and it constitutes a powerful optical illusion subject to the human mind's penchant for hindsight bias. When it "works" the mind recognizes it and ascribes it future predictive power; when it "fails", the mind either ignores it or dismisses it as something other than a "real" pattern.
Technical analysis is therefore akin to palm reading and astrology; these disciplines persist because people want to believe in their predictive power. And they appear to actually "work" sometimes.
And it occurs frequently in graphical series produced by random chart generators.
And yet, even given its colossal recent failures, the venerated head-and-shoulders pattern will never die, because people want to believe in it, and it constitutes a powerful optical illusion subject to the human mind's penchant for hindsight bias. When it "works" the mind recognizes it and ascribes it future predictive power; when it "fails", the mind either ignores it or dismisses it as something other than a "real" pattern.
Technical analysis is therefore akin to palm reading and astrology; these disciplines persist because people want to believe in their predictive power. And they appear to actually "work" sometimes.
# posted by MATT E @ 12:08 AM 
