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Insider: Tricks of the Trade, Part 1 – The Acceleration Effect & Framing Risk

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With Return to Ravnica prereleases just around the corner, authors are writing about it everywhere, evaluating the set based on playability and future value. This article will not cover any of that, as I feel my colleagues are doing fantastic work.

Instead I want to share some insights derived from the finance and poker worlds. I feel one can apply this to Magic finance and other applicable situations.

The Acceleration Effect

Derived from ‘DUCY?’ by David Sklansky

 

 

Whenever one is  asked ‘How are you doing today, sir or maddam?’ one either answers with "I am fine, thanks. And you?’ or really starts to ponder how one is feeling. The irrational thing to do would be to compare today with yesterday, the day before yesterday and so on. What’s even more striking is when we compare how we feel today with how we expect today to be.

This kind of feeling can work both ways. For instance, people who improve their lives should get a reward of feeling a little better about themselves. If they do not, then they would be chronic depressive!

The opposite can also happen. In Magic finance, for example, we make sales. Or if you occasionally play poker online, you check your results day after day.

Sklansky brilliantly writes that one is happier when one has two $100 losing days in a row followed by a $500 winning day compared to two winning days of $500 followed by a losing day of $400. The net profit in the first sequence is +$300 while the 2nd sequence grants you a $600 profit. I can totally agree with this because I used to compare Day 1 with Day 2. And those two days I compared with Day 3.

So, in the first sequence, I had two mediocre days and suddenly I earned $500. Wow! In the second sequence I had a good first day, the same profit in the secondday, which is good. But my mind can say ‘It is not improving’. The third day I lose $400, which is a huge gap compared to the other two days. I completely disregard the end results of each sequence and just compare the days with each other.

The thing I want to point out is that it can increase our natural tendency to over-emphasize the short term, especially when any financial decision we make isn't necessarily a step up over the day before.

If, for instance, one went deeply into Snapcaster Mage at $20 before the pre-B&R back in July 2012 and saw the graph steadily going down to $16, he/she might take some actions that are solely based on emotions in order to ‘’fix’’ it.

 

My word of advice is to not over-react, but rather stay focused on the goals you’ve made. If you went deep on the same Snapcaster for long-term, then stay long-term, thus avoiding seeing the volatility the short-term can bring.

When things are going well, remind yourself that you are doing a good job in Magic finance! Recognition of your progress is vital to success as it motivates almost anyone to keep doing what he/she is doing.

 

Framing Risk

Derived from ‘Inside the Investor’s Brain’ by Richard L. Peterson

When a certain financial decision is portrayed as an opportunity or gain, the brain’s reward system is engaged. When a financial decision is portrayed as a risk or something one might lose, the loss avoidance system is activated. As Richard Peterson put it himself ‘The different presentations of a decision, in terms of either what one might lose or what one might gain, is called framing’.

Now how is this relevant for us as speculators in the world of Magic? I present to you two scenarios:

Scenario one:
Imagine you have two choices. You can pay $1,000 now and the gamble is over, or you can take a risk whose outcome will be determined by the toss of a coin. If heads comes up, you lose $0. If tails comes up, you lose $2,000. Now would you take the guaranteed loss or take the risk?

Scenario two:
You have the option of accepting a guaranteed $1,000 profit or take a risk. In case of not choosing the $1,000 profit, you will flip a coin. If heads comes up, you win $2,000. If tails comes up, you win $0. Would you accept the guaranteed $1,000 or take the risk?

 

Now both problems have the same EV (Expected Value) long-term. Most people choose the sure gain in problem two but not a lot of people will choose the guaranteed loss. In a similar decision situation, Noble Prize winner Daniel Kahneman & Amos Tversky found out during their experiments that 84 percent of the participants chose the sure gain. At the same time 70 percent chose to take the risk in scenario two.1

Our brain is extremely sensitive to losses than gains when it comes to risk. Hence any decisions that can avoid those losses are highly desired by the brain. This is mostly portrayed as being ‘risk averse’.

So when we are having a guaranteed gain, we probably fear of losing it if we take a risk, hence taking the quick $1,000. But when we are talking about having a guaranteed loss, most of us, including myself, will take a risk as we want to avoid ‘losing’.

Applying this to Magic Finance is simple: most speculators are ‘risk seeking in the realm of losses’ and ‘risk averse in the realm of gains’, meaning we often hold on too long to our losers yet cut winners too short.

One personal experience I can give you is with the good old Overmaster.  I still have four copies left at $3.99. I had one customer who bought 2 out of my 6 (4 remaining) a week ago at $4.50 each. I can go extremely short and put it down to $2.50, expecting to grab a quick $10 profit, but I feel I can get maximum value by just being patient and not be afraid or fearing I might lose money on these last four cards. When writing this some days ago, I just sold my last playset after waiting a relatively long time. This does not proof that maintaining its price is value maximisation but I do feel that cutting prices while being in a rush is definitely not value maximisation.

I personally feel that this fear is steadily decreases the more experience one has doing anything involving risk. When one is familiar and consistent, confidence grows so there is less chance of actually being fearful of a particular investment.

I want to give some pointers that may seem obvious, but highlighting them will help maximize value with your speculations:

  • We are more susceptible to loss aversion after a recent and/or large losses of any nature. When being emotional distressed, we just can’t think clearly as our emotions are taking over.
  • When you reevaluate my portfolio, ask yourself ‘’All things being equal, would I start buying this card today?’’. If that is not the case, then it is better to sell over selling another card that is rising in value. An example would be overhyped cards like Skaab Ruinator
  • When it comes to mid-long term investments, it is advisable to not check the prices too frequently. It leads to awareness of volatility and impulsive, emotional sell or buy actions will trigger.
  • Create a plan! If one is speculating about a particular card, realize at what point you will start selling the card when it reaches X amount of profit. At the same time, devise a plan to sell the speculation when things are going sour (stop losses).

I definitely recommend studying and reading the two books I mentioned in this article, as it helps to understand how the human brain works, where one can overcome irrationality in everyday’s life and how to stay sharp and focused in any world containing risk.

In my next article I want to cover some more concrete trading tricks derived from marketing, behavioural economics and other areas I am excited to discuss.

~

On a side note, I have been receiving a lot of positive feedback about the Magic Online Diary project. A big thanks to you guys, as I was not so sure if that was something worth investing in. Before Return to Ravnica hits the online shelves, I will start positioning myself in the online world. I still have to work on how I want to work it out (written, video or audio) and how I should operate in terms of views (short-, mid or long term?). Feedback is always welcome!

~

I want to wish you a lot of fun, prosperous and exciting Return to Ravnica prerelease! Thank you for reading!

- Gervaise
Twitter: @Gerv055

 

Recommended readings:
Regarding Acceleration effect:

1. Ariely, Dan. 2011. ''The Long-Term Effects of Short-Term Emotions: Why We Shouldn't Act on Our Negative Feelings'', in the upside of irrationality (2011 edition), London: HarperCollinsPublishers

Regarding Framing Risk:

1.  
Weber, Martin and Welfens, Frank, Splitting the Disposition Effect: Asymmetric Reactions Towards 'Selling Winners' and 'Holding Losers' (July 25, 2008). Available at SSRN: http://ssrn.com/abstract=1176422 

2. Dhar, Ravi and Zhu, Ning, Up Close and Personal: An Individual Level Analysis of the Disposition Effect (August 2002). Yale ICF Working Paper No. 02-20. Available at SSRN: http://ssrn.com/abstract=302245 

 

  Notes

1  Novemsky, N., and D. Kahneman. 2005. ''How do intentions affect loss aversion?'' Journal of Marketing Research 42 (May): 139-140.

Gervaise Pechler

My name is Gervaise Pechler, a 22 year old Business & Psychology student, avid trader & I love playing Magic. I like to combine Psychological, Business & Economical aspects in my writings

View More By Gervaise Pechler

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12 thoughts on “Insider: Tricks of the Trade, Part 1 – The Acceleration Effect & Framing Risk

    1. Thank you Paul! I have edited the article a bit and added links in case you are more interested in the topics. I can recommend Dan Ariely one, one can find the specific chapter also on the online databases as he published it in a journal as well

  1. This is called prospect theory and the research behind it is very interesting. One thing to note is that choices within framing change between small stakes and large stakes. When dealing with something as small as $10 dollars we will probably act completely differently than we would if the stakes were thousands of dollars or more hence why we react irrationally in maximizing short term liquidity versus long term profit maximization.

      1. “I personally feel that this fear is steadily decreases the more experience one has doing anything involving risk. When one is familiar and consistent, confidence grows so there is less chance of actually being fearful of a particular investment.”

        making a routine outta something keeps fear in check.

        “When you reevaluate my portfolio, ask yourself ‘’All things being equal, would I start buying this card today?’’. If that is not the case, then it is better to sell over selling another card that is rising in value.”

        before considering any sale always ask yourself how you will redeploy capital. as long as you set rules for exiting winning positions you should avoid getting out too early. in mtg, stop losses still work. market remains inefficient enough that stock trading technique can maximize returns on winners.

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