Almost every day, you can see something on the Internet or TV that says, “stocks decline for 3rd straight day” or, “stocks up for past 4 days”. The inference here is these 3 or 4 days constitute a pattern that is likely to continue. The reality is our brains often invent patterns to offer some sense of control over things that ostensibly are uncontrollable.
Illusory Pattern Perception
Ever “knock on wood” or avoid the 13th floor in a hotel? These are small actions that make us feel less helpless. Scientists call this “illusory pattern perception”. The literature is replete with studies on how, when confronted with situations of uncertainty, individuals search for patterns even where they don’t actually exist.
So, what’s the danger? Well, if we simply extrapolate recent results, positive or negative, well into the future, we are apt to make poor decisions. We are fooling ourselves into believing that we can make future uncertainty less uncertain. We can’t.