The new science behind stock charts

1:00 PM behind, charts, science, stock No Comments

| By Richard Satran, U.S. News & World Report

Behavioral finance research is unearthing evidence that a visual plotting of stock values leads to better investment decisions.

Those crazy-sounding chart formations like "death cross," "cup and handle," "dragonfly dojo" and "falling knife" that stock traders wave about on graph paper sometimes sound as scientific as divining rods or wishbones. But behavioral finance is unearthing growing evidence that shows those wild-eyed technical analysts are not just reading astrological charts and have one thing scientifically right: Plotting stock prices visually leads to better investing decision-making.

The stock market has been gaining this year with help from one important chart signal -- the level of market "exuberance" as seen in buy and sell patterns and market volume. "It has been a market rally that has been avoiding excesses," says longtime technical analyst Philip Roth. This behavior points to more gains, he adds, but a lack of enthusiasm -- a healthy sign for now -- could eventually derail the rally.

Purging passion from market decision-making is one of the basic rules chart followers live by. They see the market as a virtual animal whose moves can be read through the emotional extremes of fear and greed, which comprise market sentiment at a given point in time. They point to the work of MIT finance professor Andrew Lo, whose behavioral psychology experiments and long-range studies have shown the impact of these animal spirits.

Studies of such market dynamics have "already demonstrated an ability to understand many aspects of financial markets," wrote Lo in a recent paper on efficient markets, although he adds that the science is "in its infancy." He studied day traders and hedge fund managers in depth, using tools of neuroscience and behavioral studies to show that markets are ruled primarily by emotions, challenging the long-held view that they price stocks based on information alone.

But other researchers warn against basing your next stock market purchase on what today's "pitchfork" or "ascending triangle" might say, because charts alone don't inoculate against the risks of emotional decision-making.

Other behavioral science studies find the limits of such tools. Duke neuroscience and psychology professor Scott Huettel has done research that shows people often see patterns that are not there, or that others do not see in the same way that would produce a meaningful buy or sell signal. "People are very good at thinking they see trends that don't mean anything in just a random sequence of numbers," Huettel says. "You really cannot predict things that way."

So what has behavioral science shown that those charts are good for? This, at least: Information presented visually is a lot better than a bunch of numbers, behavioral scientists have found.

Anya Samak, now an assistant professor at the University of Wisconsin School of Consumer Science, ran an experiment while doing research at the University of Chicago in which she gave theoretical cash amounts to students to invest in the market. Those with access to visual data ended up with significantly more cash in their portfolios.

The use of visual tools helps counteract information overload and complexity, she says, and "enables users to interactively discover information from large information sets to improve the financial decision-making process." Her work also suggests people gain confidence and base decisions on a wider range of choices when using visual data.

Behavioral psychology studies suggest the value of presenting data visually, but only as a tool in making an informed decision. Indeed, David Littlejohn, chief technical analyst at BigFoot Investments, says charts are extremely valuable in making investment choices, but technical analysis alone does not work. It's just one tool to use along with a full view of a company's earnings and business fundamentals.

He offers the following tips for people who want to incorporate "chartistry" into their investing decisions:

1. Start with a fundamental look at the company based on its earnings and dividend potential. "Don't start by looking at charts," Littlejohn says.

2. Use the same metrics consistently. The process of charting stocks aims to provide consistent benchmarks and measurements that remove emotion and replace it with specific buy and sell targets.

3. Watch moving averages. This is the basic concept of charting. When a stock moves out of its trading range, it suggests movement, up or down.

4. Question your emotions. "Most of the time when you base a decision on emotions, you will be wrong," Littlejohn says.

He reaffirms the first point: Don't get carried away with charts. "Before you even start doing that, evaluate the fundamentals because they are what supports everything. Otherwise, you are just running with the lemmings," he says.

Technical analyst Roth puts less stock in those fundamentals, and still argues that emotions will always trump "information-based" decisions. After working for nearly 50 years on Wall Street at firms such as Morgan Stanley and Miller Tabak, Roth has dealt with his share of skeptics. Now in retirement, but still an active market-watcher, he feels vindicated by the work of behavioral scientists. "It's a huge confirmation from academia when they say there is information in those chart patterns," he says. "We've known it for 100 years. We called it market psychology. Now it's behavioral finance."

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US lags way behind in science, math grads

6:50 PM behind, grads, science No Comments

Organisation for Economic Co-operation and Development

When it comes to churning out young workers with college degrees in math and science, the United States lags well behind other advanced democracies, ranking just behind Turkey and Spain, according to a new analysis.

The Organization for Economic Co-operation and Development analyzed education rates in its member countries and found that the U.S. is below average in the relative number of 25- to 34-year-old workers who have a degree in so-called STEM fields such as science, engineering, computing and statistics.

That’s a potential problem because research has shown that innovation in any economy depends on how many workers have such degrees, said Ronald Ehrenberg, director of the Cornell Higher Education Research Institute.

“It is something that we should be concerned about,” Ehrenberg said

There are about 1,472 math and science grads for every 100,000 employed 25- to 34-year-olds in the United States, according to the data. The compares to more than 3,555 in Korea, which leads the chart, according to the OECD figures based on 2009 data.

The United States falls between Spain and Iceland on the chart, and is noticeably lower than the OECD average. The figures do not reflect how many people with STEM degrees are actually employed in their field or using the skills they learned.

Jobs available for graduates with degrees in math, science and engineering tend to pay well, said Anthony Carnevale, director of Georgetown’s Center on Education and the Workforce. But there are plenty of ways in which American culture dissuades its most promising kids from going into those fields.

For starters, many young Americans believe they can make more money with a degree in a business, finance or a related field, Carnevale said. Americans also seem to place more value on jobs in those fields.

“(If you’re) a smart high school kid, doing well, your image of what you want to do is not to wear a white smock every day and sit on a stool with a beaker,” Carnevale said. “You’re in a culture that drives you toward more convivial and more social kinds of work, and it pays better.”

Young Americans may also not be getting enough exposure to math and science, said Cornell’s Ehrenberg.

At the K-12 level, he said, it can be tough to recruit great math and science teachers because college graduates who specialize in those areas can probably find better-paying work outside teaching.

In addition, some students may have a hard time finding the right role models in college math and science departments, said Ehrenberg, who noted that many science and math faculties are dominated by white and Asian men.

Ehrenberg said many colleges and universities have tried to recruit faculty from more diverse backgrounds and to develop more family-friendly policies to retain women and non-traditional students in the fields.

“I think role models do matter,” Ehrenberg said.

For now, at least, Carnevale said many companies are simply poaching talented young science and math graduates from other countries. But as those countries ramp up their own businesses, that may be tougher to do.

Still, he said it also may be hard to fight the biases that have come to value lucrative non-scientific fields such as finance and law.

“A labor market is a social institution as well as an economic one,” he said.

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Online dating: the science of love at first byte

8:27 AM dating, first, Online, science No Comments

Online dating sites advertise groundbreaking technology and sophisticated formulas and state-of-the-art programming to help you find your true soul mate.

But does it work?

Though the technology found its own match with the rise of the Internet, the idea has been around for half a century. In 1965, a pair of University of Michigan undergrads found each other with the help of a primitive computer dating program.

Mina Jo Rosenbloom was in her junior year when she and Michael Linver, just admitted to medical school, became computer dating’s digital Adam and Eve. She didn’t have much faith that it would work. He came across a crazy ad for a dating service that used computers. Their mutual willingness to take a chance paid off.

Four and a half decades after they were hitched by an IBM mainframe, Michael and Mina Jo Linver are still married.

“That was the beginning of what turned out to be an incredible relationship for the rest of my life,” he said.

It was also the start of an industry designed to exploit a market: millions of singles eager – or desperate – to find a match. Punch cards and personal ads gave way to the first online dating sites, launched in the mid-90s. By 2001, industry revenues were just $40 million. Today, they’re approaching $2 billion.

With some 1,500 sites claiming they can match your personality type, your genes – even your facial structure - to potential mates, no company touts a “formula for success” as much as eHarmony, which owns 15 percent of the market.

The company says the goal is to help you find someone - like you.

Similarity is the thing that allows couples to understand each other better, said Gian Gonzaga, the company’s chief research scientist, who holds a Ph.D. in psychology from U.C. Berkeley. “We like to say that opposites attract and then later on they attack.”

Marriage-minded and straight-laced
At eHarmony, Gonzaga said he focuses on appealing to the marriage-minded and the straight-laced.

“We’ve always focused on long-term relationships,” he said. “That feels very unhip and very squarish. But really, when it comes down to it, our desire to find someone to connect with, to find a long-term relationship is a very deep part of our psyche.”

Long before the conversation turns to matrimony, finding your online match takes commitment. Subscribers fill out a compatibility survey with hundreds of questions and pay as much as $60 a month. The results, according to eHarmony’s claims, are striking.

“On average, 542 people a day got married after meeting on eHarmony,” said Gonzaga. “That’s about 5 percent of all of the newlyweds in the population. It's almost 100,000 couples a year.”

Those numbers are hard to substantiate. But they do include Steve Caplette, who was overcome with emotion on the day he wed Sally Petruzello. For her part, it was love at first click.

“He was my first match,” she said. “You usually get seven people, and he was literally the first one that I opened up.”

Among other compatible traits, eHarmony found that Steve and Sally both tend to be more introverted, have strong anger management skills, and a sense of romance. eHarmony’s algorithm worked for Steve and Sally. But it’s not at all clear that kind of success is typical.

“I think it's fair to say that we know a little, but we probably don't know enough to have an algorithm that we think is really good,” said Dan Ariely, a professor of psychology and behavioral economics at Duke University. “If you look demographically it doesn't look like they're increasing the amount of marriages.

CNBC: Love at First Byte

Ariely questions whether algorithms used by online dating sites actually work. His research was sparked by a profoundly personal understanding of the nature of human attraction. In his late teens, he was hospitalized for three years with a bad burn injury as he healed, he worried that his value in the dating market had plummeted.

“I knew my place in the social hierarchy before I got burned,” he said. “I knew which girls would date me in principle and which ones would not. And I started thinking about where do I fit in, where do I fit in now?

Ariely eventually fit in as an expert on human behavior. He studied thousands of online interactions, examining market value — what makes us attractive online. In men, the research shows, height and salary are key. Ariely said that a 5-foot, 9-inch tall man like himself would need to add another $40,000 a year to his annual income to hold the same attraction as another guy who stands 5'10".

Education also counts - for some online daters.

“More educated men are more desirable,” said Ariely. “For women, there's no value for education. Women who are more educated don't necessarily get any more attractive in online dating.”

For some singles, the idea of reducing romantic attraction to an algorithm may seem too simplistic. But Ariely says the problem is the simplistic way sites make us describe ourselves, using attributes that are easily searchable by computer but aren’t so useful in figuring out who we like or love.

“The (online) description is very skeleton-like,” he said. “We fill the gap in over-optimistic ways. And then you go and meet them for coffee, there's a gap between what you built in your mind and between what they really are. And that gap causes tremendous disappointment.”

That doesn’t make for an auspicious start, especially since, according to Ariely, setting up each of those cups of coffee takes an average six hours of online drudgery.

'Tyranny of choice'
To solve the paralyzing problem of too many possibilities, which scientists call “the tyranny of choice,” online matchmaker eHarmony doesn’t let you browse its database. They let their computers do the searching and sorting for you.

“Imagine you walk into a stadium, and you see tens of thousands of people and you say, 'I wish I could go on a date tonight,” said Joseph Essas, eHarmony’s technology chief. “So you look at all those tens of thousands of people, what are you going to do? It's overwhelming.”

Instead, eHarmony’s algorithm doles out just a few matches per customer per day. Then it’s your turn. Computers are not good with emotions and feelings, said Essas. But they’re very good at finding needles in a haystack.

And eHarmony claims to have a big haystack – but it’s not exactly clear just how big. At one point the company claimed some 40 million registered users. Some industry analysts say the pool of active users is more like 750,000.

A percentage of the daters who appear on eHarmony—and other dating sites—are not even paying subscribers, leading one critic to say that many users are, “flirting into the void.” Still, eHarmony is doing a number of things well, according to Dan Ariely.

“First of all, they have this million-question survey,” he said. “By doing that they basically kind of separate the serious people from the non-serious people. On top of that they create this belief in their algorithm. And they say, ‘look, we have some magic potion here.’ “

That may have a self-fulfilling effect on customers, but it hasn’t convinced Ariely that online dating companies are using hard science.

“The truth is, we're very far away, in the science part, from understanding how this works,” he said.

For some, the proof is in the pudding. After forty-four years of marriage, three children, and six grandchildren, Michael and Mina Jo Linver are still grateful for that mainframe with a heart.

“The rest is the magic, the mystic kind of elements that attract people to each other,” said Michael. “And that's something that I don't think any computer can really do. It just either happens or it doesn’t.

© 2012 CNBC, Inc. All Rights Reserved

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