Short Sellers and Negative Reinforcement

While watching an interview with Jim Chanos, a particular quote stood out about short sellers, and positive and negative reinforcement:

“What I like to point out is that almost everybody that will view this video is the beneficiary of a positive reinforcement cycle in their life. That is they were told to study hard by their parents, go to good schools, get good grades, go to better schools, get a good job, work hard, get promoted, be paid well…  The so-called virtuous cycle.

Studies have shown that most rational people, including people that fit that profile, that their decision making breaks down in an environment of negative reinforcement. The ultimate example of which would be interrogation, where your ability to withhold information is broken down by various physical or mental techniques.

If you think of wall street, it’s a giant positive reinforcement machine. Basically, I come in every morning, flip on my blackberry and check Bloomberg at five in the morning. And of the hundred short ideas that we have in our global fund, I can pretty much predict there’s going to be about twenty to twenty five percent everyday where there is some sort of commentary, research report, analyst buy recommendation, estimates raised, or CEO’s on Bloomberg or CNBC. And generally, its noise. Generally there’s not much information or content in that, but it’s nonetheless positive noise. It is why you should be investing in company “A” “B” or “C”.

Most people don’t notice this because they’re in the business going long securities. I like to say this is the muzak that plays in the background of the investment world. But if you’re a short seller, this is negative reinforcement. You’re being told that one-quarter of your portfolio every morning is wrong. For most people, that becomes a difficult environment in which they continue to think clearly about their investments. There’s a constant drum beat of just negative reinforcement saying you’re incorrect, you’re incorrect.”



The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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