Recently I had the pleasure of teaming up with Philip Pearlman to establish a theory involving clinical prescription for irrational market participant behavior, The Cognitive Theory of Noise (CTN). Pearlman is currently an investor in the popular stocktwits.com, a contributor to Jim Cramer's thestreet.com, and a former successful hedge fund manager with 50 million in assets under management. Pearlman began the development of CTN while working towards his doctorate in Clinical Psychology. As I was finishing my masters’ work in Industrial Organizational Psychology, I contacted Pearlman regarding his interest in synthesizing psychology and market behavior. Needless to say, we both understood the power of such an amalgamation.
Though the Cognitive Theory of Noise (CTN) is still developing, the main premise as Pearlman had laid out here is looking at behavioral economic phenomena in its true framework of social psychological. Furthermore, because of clinical psychology’s kinship to social psychology CTN was nascent. Aaron Beck developed an empirically validated theory of treatment for abnormal behavior in society. It is with this accord that CTN can describe abnormal versus normal market participant behavior, but most importantly provide tools for clinician, trainers, and the like to implement prescription. In other words, provide treatment for irrational market behavior.
Over the next coming months Perlman and I will be posting examples, further advancing CTN. In the next week I will be posting a descriptive model of the Gambler’s Fallacy within the CTN framework, in tandem with providing prescription to help ameliorate its effect during trading.
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