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Psychological mechanisms of manipulation: freezing and escalation of commitment effects in Forex

By JohnLast 2680 days ago Comments (2)

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Here I give the sources of my reasoning. This is a little book, in fact very interesting about manipulation (well there is a plethora of books on that but this is different). The book is intitulated: Petit traité de manipulation à l'usage des honnetes gens, and is written by Robert-Vincent Joule and Jean-Léon Beauvois.

In a nutshell there are some psychological mechanisms that work without any form of persuasion and that give results that cannot be achieved without them. The interesting point is that there is a statistical evaluation of all this.
Unfortunately this book is in french and I do not know if there is an English version.
You can check also this wikipedia link 
Ok let get started with the basics. This is the first example.
 
There have been an experiment by Moniarty (1975) Crime, Commitment, and responsive bystander in two field experiments", Journal of Personnality and Social Psychology, 31, 370-376.
One man places himself close to a group of people at the beach in New York (I was surprised to know that there are beaches in New York). There are two groups. At one of the groups he asks for fire for his cigarette to the other group he ask that he will leave for a while asking them to have a look at his radio. Then a fictive thief intervenes the group with the fire reacts at 20 % of the cases. The other group reacts at 95 % of the cases.
 
The same experiment was conducted in a restaurant with an elegant and expensive bag. The control group reacted 12.5 % of the time the group asked to take a look reacted 100 % of the time.
 
The interpretation of the those results is very interesting in the book for manipulation. The authors believe and in both cases to the group was made a demand, this demand is a kind of demand they cannot refuse. And this causes a reaction response that can lead to very different experimentally verified results. This is an effect of commitment, people tend to follow what looks like their own decision. This leads to a freezing. It is called a freezing effect. People get blocked in a certain behavior. Lewin K. 1947. "Group decision and social change" in T. Newcomb, E. Hartley (Eds.), readings in social psychology, New York, Holt.
 
Those kind of experiments are repeated (of course) making financial world simulations. There has been an experiment. One group of finance students are asked to take a decision. A student has to take the role of managing director and make very important decision in order to finance a branch of the company showing outstanding results. There have been a lot of fundamental data showing extreme profit possibilities. After that intervenes the second stage of the experiment the same directors are given the responsibility to relocate resources between the branches of the company, this time the fundamental data showing a complete disaster of the the first choice and showing very bad expectations for the future for the same branch. However the Managers took a decisions favoring the branch that they have favored at the past.
 
The other control group in the experiment were asked to replace the boss of the company. This time the first decision for financing was taken by their boss based on the first data. Now they are at the second stage trying to relocate resources within the company. In this group they do not felt bounded by the decision of the manager and made an allocation of resources based on the new date.
 
This effect is called an escalation of commitment.
 
Now let see things from trader's perspective. I am simply extrapolating.
There are two groups if traders. To the first group they tell them that they have just an amount of money to gamble with, to the other group they tell them that they have to sign a contract.
 
Do you think that the people who signed a contract will feel more frozen and will keep and keep playing (trading) than the people who were not bound by an engagement and a contract?


Comments

  • JohnLast 2680 days ago

    Link number 666 is that a coincidence?

  • JohnLast 2680 days ago

    The biggest problem in the industry for the retail traders, we can call them also home traders is that they are not profitable at their majority.

    This is a fact. Most of the people who are trading Forex are not profitable. There is some kind of mantra saying that 90 % actually loose money.
    So the question arises why we do trade. Why we keep doing that knowing that there is a big probability that this would be a great loss of efforts, time, self esteem, and money that can eventually lead to disastrous situations.
    Is there some psychological reason for which we keep doing that and that reason is completely below the radar?
     
    I think that there is such a reason. There are psychological studies (of course not in the domain of finance, but the results are really meaningful ) showing that there is a very strong hidden psychological process that keep traders to trade and trade again. Even if they know that there is 90 % chance of loosing in the long term that does not change anything.