Bent to the Illusion

The Müller-Lyer illusion, a famous optical illusion (involves) two sets of arrows. The arrows are exactly the same length. But in one case, the ends of the arrows outward, seem to signify expansion and boundless potential. In the other case, they point inward, making them seem self-contained and limited. The first case is analogous to how investors see the stock market when returns have been increasing; the second case is how they see it after a crash.

“There’s no way that you can control yourself not to have that illusion,” (Nobel prize winner) Daniel Kahneman told me. “You look at them, and one of the arrows is going to look longer than the other. But you can train yourself to recognize that this is a pattern that causes an illusion, and in that situation, I can’t trust my impressions; I’ve got to use a ruler.”

Nate Silver, The Signal and the Noise