Apophenia

I have been reading the book Pattern Recognition by William Gibson. It doesn't really have anything to do with the stock market or stock market analysis in general, but the general tone of the book hints a few times (and even outright mentions it) at the idea of apophenia.

The Answers.com page for apophenia tells us:

Apophenia is the experience of seeing patterns or connections in random or meaningless data. The term was coined in 1958 by Klaus Conrad, who defined it as the "unmotivated seeing of connections" accompanied by a "specific experience of an abnormal meaningfulness".

Conrad originally described this phenomenon in relation to the distortion of reality present in psychosis, but it has become more widely used to describe this tendency in healthy individuals without necessarily implying the presence of neurological or mental illness.

In statistics, apophenia would be classed as a Type I error. Apophenia is often used as an explanation of paranormal and religious claims. It has been suggested that apophenia is a link between psychosis and creativity.

Some immediate examples of this might be:
1) From William Gibson's own blog, he mentions that seeing the Virgin Mary in burnt toast is a perfect example of apophennia
2) John Nash, made famous to the masses in the movie A Beautiful Mind (and famous to scientists/mathematicians for his equilibrium theory which revolutionized Game Theory at the time) - he was seeing many things which weren't there. This was both a curse and a godsend, since it was part of his schizophrenia but also part of his ability to use the pattern recognition to help him in scientific ways.
3) Quacks around the world, from those who believe that something in the night sky which can't easily be explained by those of us without much knowledge of events in the sky... must be aliens flying around in spaceships, those who feel that everything is a government conspiracy far more complicated than anything appears on the surface - all of which are discussed in two books that are on the Suggested Reading list for this site. A Demon Haunted World, and How We Know What Isn't So.

All in all, the logical step that is probably obvious which I would like to then follow is that the stock market is an area ripe for this issue. As I have mentioned before on this site, humans are genetically evolved to see patterns easily, even if they aren't there. An error on the side of seeing a pattern is usually going to be far safer than not seeing a pattern at all. The problem is that in matters of things like the stock market, it actually can be dangerous financially to think you see something there which doesn't really exist.
This is something that I think we should keep firmly in the front of our minds when we are discussing analysis on this site. There are things that might look really good to us and seem to indicate the way a stock is or will move. But it is very much possible that we are just seeing another fine example of apophenia.

Posted by ESS at February 28, 2005 02:39 PM | TrackBack