The following excerpts are from Stephen Jay Gould’s Full House.
People under assault, and hopelessly overmatched, often do the opposite of what propriety might suggest: they dig in when they ought to accommodate. We call this behavior siege mentality. Davy Crockett, Jim Bowie, and Co. won posthumous immortality by their intransigence at the Alamo, but an honorable surrender (given their hopeless situation and the certainty of carnage with continued fighting) might have secured the more worldly privilege of telling good war stories over a beer at a Texan bar (for independence from Mexico would have been won in any case) some twenty years later. The embattled traditionalist [buy and holder] must therefore stand his ground on the right tail of his natural habitat. He must adopt a siege mentality and dig in to protect his own restricted turf. The right tail, he must now admit may be small and merely consequential. But grant me, he pleads, this last potential natural comfort: ‘May I not at least be a king in my own restricted castle?’ Give me, then, at least, this one remaining solace in a parody of a fine old song: ‘It had to be me, wonderful me; it had to be me.’ Let me, in short, live like Pio Nono (the nineteenth-century Pope Pius IX). My predecessors held temporal power over much of Europe. I once ruled a good part of Italy, though I am now confined to a tiny principal — Vatican City — within Rome. But at least my rule here is absolute and I can proclaim my infallibility!
TurtleTrader comment: Gould makes the clear point on human psychology: Most people do not want to reach outside their knowledge area (or comfort zone). What most people want (at often the expense of their best interest) is their own little kingdom. Not a good way to be if you desire to profit from the market.
Human Culture
A potential for inherent progress provides no guarantee of realization in actuality. The radical contingency of all history can intervene in a thousand potential ways. A capacity for technological accumulation does not guarantee that all cultures will avail themselves of this potentially mixed blessing. In fact, several great societies have made conscious decisions not to pursue technological progress to the inevitable destruction of an old order. At a crucial point in the history of human life, imperial China decided to scrap the technology of interoceanic shipping and navigation that, if pursued, might well have converted the central historical theme of European westward expansion to an alternative tale of Oriental eastward exploration in the New World. In the early 1640s, after a century of relative openness to Western inventions, especially to the musketry that permitted their assumption and consolidation of power, Japan’s ruling Tokugawa shogunate severed all future accumulation and banned most of what had been imported. So complete and sudden was the cutoff that Japanese inhabitants of various trading cities established abroad were not even allowed to return home. All Western trade was reduced to the merest trickle. Only two Dutch ships could arrive each year. They could dock only at Nagasaki, and all Dutch traders had to live on the artificial island of Dejima, connected to the rest of Nagasaki by a narrow and easily guarded causeway.
TurtleTrader comment: There are many reasons when people are faced with better opportunities (or strategies) they run the other direction. Good traders take advantage of that weakness. Even if you think you are avoiding the fight, you still lose. The fact that one doesn’t want to face reality doesn’t make reality go away.
Trend Following and Bayesian Statistics
The siege mentality Gould describes in the first passage is the buy-and-hold investor who knows the approach has failed, can see the price declining, and digs in anyway. The position has become a castle. Defending it has become an identity. Admitting the approach is wrong would require surrendering the kingdom, and that psychological cost exceeds the financial cost of continuing to hold. The result, as at the Alamo, is total loss where an earlier exit would have preserved most of what mattered.
The Tokugawa shogunate example in the second passage is the same psychology at civilizational scale. Faced with technology that would disrupt the existing order, Japan’s rulers chose to ban it rather than adapt. The cost was two centuries of enforced isolation and eventual forced reopening under circumstances far less favorable than an earlier voluntary adaptation would have produced. Investors who refuse to adapt their strategy when presented with evidence that it is failing are making the same choice at portfolio scale. The evidence is the price. The price is declining. Acknowledging that and adapting is the option available. Digging in to defend the position’s original thesis is the siege. Reality does not care about the thesis.
Frequently Asked Questions
What is “siege mentality” in trading?
Siege mentality is the behavior of digging in to defend a failing position rather than adapting to the reality that the position is wrong. The trader becomes so invested in defending their original thesis that acknowledging the failure feels more costly than the financial losses accumulating from continued holding. As Gould observed, people under assault often do the opposite of what their situation requires.
What does Gould’s Tokugawa example mean for traders?
That the refusal to adopt a better strategy when one is available is not a neutral choice. Japan’s isolation from Western technology created the conditions for a much worse eventual forced opening. Investors who refuse to adapt their approach when presented with evidence that it is failing do not avoid the loss by refusing to see it. They typically produce a larger loss by delaying the adaptation.
Why do people cling to their investment “kingdoms” even when they are losing?
Because the investment has become an identity rather than a position. Selling it means admitting the original judgment was wrong, which feels like a personal failure rather than a market event. Trend following eliminates this by making exits mechanical. The stop is hit and the position is closed by rule, not by the trader’s willingness to admit defeat. The identity is not at stake because the system made the decision.
Trend Following Systems
Want to learn more and start trading trend following systems? Start here.
