Thirty years ago, Amos Tversky passed away.
One of my favorite quotes of his was simple: “My colleagues, they study artificial intelligence. Me, I study natural stupidity.”
It’s a funny line. But the older I get, the more profound it becomes.
I don’t think Tversky was really studying stupidity. I think he was studying irrationality.
He was studying what happens when intelligent people make irrational decisions. He was studying the gap between how people should behave and how they actually behave.
And if there’s one place on Earth where that gap is exposed every single day, it’s the stock market.
Everybody’s talking about artificial intelligence today. That’s understandable.
But I’ve spent most of my career studying something else entirely.
Human beings.
The Rabbit Hole
I started going down the psychology rabbit hole 20 years ago.
One of the first books that really opened my eyes was Martin Pring’s “Investor Psychology Explained.”
I read it in 2006, which was probably when I started to appreciate how bubbles form, how crowds behave, and how emotions influence decision-making.
Looking back, I still didn’t fully understand it at the time. But it planted a seed. And then came the Great Financial Crisis.
Like a lot of investors, I learned some painful lessons. What became obvious to me during that period was that success in markets wasn’t just about analysis.
In fact, analysis was often the easy part.
Execution was the hard part.
You could have the right thesis, the right research, the right charts, and still fail because you couldn’t control your emotions.
Fear, greed, ego, regret, overconfidence, loss aversion: These are the forces that destroy portfolios.
That realization sent me deeper down the rabbit hole.
I started studying the work of Daniel Kahneman, Richard Thaler, Annie Duke, Jack Schwager, Morgan Housel, and so many others.
The more I read, the more fascinated I became with the decision-making process itself.
Why do people consistently make the same mistakes? Why do investors panic at bottoms and become euphoric near tops?
Why is doing the right thing often so difficult, even when we know exactly what the right thing is?
What I eventually learned is that there are really two battles taking place.
The first is internal.
Can you stay disciplined? Can you follow your process? Can you execute your strategy when your emotions are screaming at you to do the opposite?
The second is external.
Can you recognize that most people won’t?
Stress Reveals the Truth
Human beings are incredibly intelligent.
We’ve built civilizations, sent people into space, and mapped the human genome.
Now we’re creating machines capable of producing things that would have seemed impossible a decade ago.
Intelligence isn’t the problem. Stress is the problem.
The higher the stress level, the more irrational human behavior becomes. And nowhere are stress levels elevated more consistently than when money is involved.
We’re not running from lions anymore. We’re not hiding from predators in the wilderness. But the fear of losing money triggers many of the same emotional responses.
Our brains don’t know the difference between physical danger and financial danger. That’s why loss aversion is so powerful.
It’s why people refuse to sell losers. It’s why they panic at exactly the wrong moments.
It’s why they chase the things they should have bought months earlier.
And it’s why markets continue to offer opportunities year after year after year.
Because while technology changes, human nature doesn’t.
Stress Reveals the Truth
At TrendLabs, and especially within The Divergence, this isn’t some side interest.
It’s the entire foundation of what we do.
We’re looking for the divergence between what people think is happening and what is actually happening.
When that spread becomes large enough, opportunity emerges.
Sometimes investors become excessively pessimistic. Sometimes they become wildly optimistic.
Sometimes they’re terrified. Sometimes they’re euphoric.
The story changes, but the underlying behavior remains remarkably consistent.
The beautiful thing about markets is that irrational behavior can be measured.
Sentiment can be measured. Positioning can be measured.
Behavior can be measured.
And when we can identify those moments where emotion has overwhelmed logic, we can put ourselves on the other side of the trade.
That’s the edge.
I’ve built an entire company around that idea.
So when I think about Amos Tversky 30 years after his passing, I can’t help but appreciate the impact he had on my career, even indirectly.
He inspired the people who inspired me. His ideas shaped the thinkers whose work helped shape my own process.
Today, everyone wants to talk about artificial intelligence.
That’s fine.
I’ll continue studying natural stupidity – or what I prefer to call irrational human behavior.
Because it remains one of the most reliable profit opportunities I’ve ever found.
Stay sharp,
JC Parets, CMT
Founder, TrendLabs