Artificial randomness: shuffling iPods, philosophical hunter-gatherers and technical analysis


Liam Nunn, European small cap team, Old Mutual Global Investors

"Our brain is an excellent pattern-matching device. It will find patterns where there aren't any."

Babar Zafar, lead developer at Spotify[i]

“Scientists know that one of the clearest ways to reveal the meaning of data is to display it in some sort of picture or graph. When we see the data exhibited in this manner, meaningful relationships that we would likely have missed are made obvious. The cost is that we also sometimes perceive patterns that in reality have no meaning. Our minds are made that way – to assimilate data, fill in gaps and look for patterns.”

Leonard Mlodinow, The Drunkard’s Walk[ii], p.182

We’ve all most likely encountered that annoying moment when the shuffle function on Spotify or iTunes throws up the same song two times in a row (or plays three tracks from the same obscure album in a short space of time). In a recent article on the BBC news website entitled ‘How random is the random on your music player?’, reporter David Lee outlined how the existence of this phenomenon has caused many customers to complain that the shuffle function on their devices isn’t working properly…

Of course, occasional repetition should be expected with a truly random selection process; but the human brain isn’t wired to perceive randomness in this way. In response to recurring complaints from aggravated customers, music service providers have been forced to develop sophisticated algorithms to minimise the repetition of similar songs and smooth-out genre selection. In other words, they’ve had to un-randomise the shuffling process in order to make it feel more random for their users. This raises some pretty interesting questions and has a lot of relevance to the field of investing. Why is the human mind so flawed when it comes to the perception of random sequences? Why is it that we feel – somewhere deep within our gut – that the numbers one to six look less likely to come up on the national lottery than a more aesthetically ‘random’ looking collection of digits? And why is it that we instinctively look for (and often falsely construct) patterns when confronted with random noise?

The answer probably has a lot to do with the way our brains evolved while we were still wandering in loincloths through the grasslands of Africa. A sudden movement in the long grass up ahead isn’t necessarily an indicator that a lion is about to leap out and maul us to death (do lions maul?); but if we were to observe one of our more unfortunate hunter-gatherer mates being torn apart by a pride of hungry lions – after noticing a movement in the grass – it’s probably not a bad pattern to recognise if we wish to avoid the same fate (movement in the grass = danger = leg it). While this no doubt led to countless false alarms and wasted energy for our ancestors; suffice to say that hunter-gatherers of a David Hume bent – who stood around debating whether the underlying argument would stand up to philosophical scrutiny – probably didn’t have much chance of passing on their genes (speaking as a former philosophy student and general behavioural-investing bore – I can confirm that some things never change). In other words, our brains have likely evolved to seize on even the slightest indication of potential patterns or chains of causation, with the unwelcome side effect that we find it extremely difficult to separate meaningful signals from a vast sea of utterly meaningless noise.

Logically enough, I’m going to try and tie all this back to the world of investment. As sophisticated modern humans we like to think of ourselves as intellectually superior to our grunting caveman ancestors – but biologically we remain essentially identical – and the shuffling iPod example is a powerful reminder of the mental shortcuts we’ve retained. The same pattern-seeking behaviour that helped us avoid the jaws of prehistoric predators continues to influence the way our brains process information today; and nowhere is that more apparent than in the stock market. All too often investors make huge generalisations from statistically insignificant sequences of data, overtrade on the basis of perceived ‘signals’ in the charts of stock prices/economic indicators; and generally seek to impose a comforting order on the random chaos of short-term market fluctuations through (flaky) causal narratives.

Fighting our instincts in this regard is incredibly difficult, but it’s also likely to be one of the most powerful ways we can differentiate from the vast herd of hunter-gatherers that continues to roam the plains of the stock market. The innate human ability to identify patterns is – in the right context – one of our greatest natural assets; but for modern investors that are inundated with vast amounts of data on a daily basis it’s also one of the most dangerous behavioural biases we face. Next time a broker tells you a stock just broke through its resistance level it’s probably best to put down the phone, crank up your iPod and drown out the rubbish with the comfortingly artificial randomness of iTunes.

[i] Quoted in Lee, David, How random is the random on your music player, [http://www.bbc.co.uk/news/technology-31302312]

[ii] Mlodinow, Leonard, The Drunkard’s Walk, p. 182

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