specify outcomes that would clearly define aforecast error. For example, if the market were to drop 20 percent beforeit advanced 20 percent, the prediction would be wrong. End of story! Thethird forecast, a signal, implies a clear procedure for evaluation—com-pute the gain or loss from date of the buy until the date of the sell signal.Falsifiable forecasts would provide the analysts and their customers withvaluable feedback. Unfortunately, few subjective forecasters do this.
SECOND-HAND INFORMATION BIAS: THE POWER OFA GOOD STORY
 
No one has the time, much less the expertise, to obtain all necessaryknowledge via direct experience. Therefore, by necessity, most of whatwe know we learn secondhand from those who purportedly do know.Among the myriad ways knowledge is communicated, the narrativeaccount or story is by far the most popular. Biologist Stephen Jay Gouldcalled humans “the story-telling primate.” We have been sharing ideas thisway for thousands, perhaps millions of years. Consequently much of whatThe Illusory Validity of Subjective Technical Analysis 59
we know, even including how to do arithmetic, is stored in the mind in anarrative format.”®
For this reason, good stories are more powerful persuaders than ob-jective facts. Psychologists speculate that concrete, colorful, and emo-tionally interesting tales have a powerful impact on our beliefs becausesuch stories call to mind pre-existing mental scripts.’ Concepts and ab-stractions simply cannot light up the brain’s story networks the way alively tale can. Philosopher Bertrand Russell said that when we learnthings informally (nonscientifically), we are impacted by the “emotionalinterest of the instances, not by their number”® It is for this very reasonthat scientists train themselves to react in exactly the opposite way, that isto discount dramatic stories and pay attention to objective facts, prefer-ably those that can be reduced to numbers.
Not all stories are equally compelling. To command attention, a storymust be interesting and understandable yet not bore us with what we al-ready know. We are most captivated by vivid accounts about real people,preferably people we know. Stories that speak to our emotional needswhile being entertaining and informative sell the best. A good tale not onlyenlivens us, but it gains a life of its own, as it is told and retold over andover again.
The Conflict between Truth and Tale
A conflict exists between our desire for knowledge and our desire that itbe delivered in the form of a good story. Humorist H. L. Mencken put iteloquently; “What ails the truth is that it is mainly uncomfortable and of-ten dull. The human mind seeks something more amusing and more ca-ressing.” Reality tends to be full of inconsistencies, so an audience mustrely on the integrity of the storyteller to tell it like it is rather than howthey would like to hear it.
Regrettably, even when the primary intent of a secondhand accountis the delivery of knowledge, it is often biased to satisfy the audience'sappetite for an engaging story. Storytellers know full well that informa-tion delivered with too many qualifiers is unappealing. Consequently, in-consistencies and ambiguities are minimized while cohesive aspects areamplified. Although these editorial modifications make the accountmore digestible, they can rob it of its essential truth. In the end, the audi-ence comes away with an exaggerated impression of the information’sclarity and validity. This even occurs when the findings of scientific pa-pers are summarized and communicated. Over numerous retellings, thetruth gets left further and further behind. What started out as a resultwith possible significance may end up being reported as a discovery ofhigh significance.GO > METHODOLOGICAL, PSYCHOLOGICAL, PHILOSOPHICAL, STATISTICAL FOUNDATIONS
Especially persuasive are accounts that link events with the chain ofcause and effect. The perception of causal relationships is a natural cog-nitive capacity® and causal chains satisfy our need to explain events inthe world around us.*! Studies of jury decisions show that the bestcausal narratives win in the courtroom.” The side offering the story thatbest ties the evidence into a coherent and credible sequence often car-ries the day."
The problem is that cause-effect explanations that are, in fact, falla-cious are hard to detect when they are plausible and appeal to a sense ofthe ironic. One story that has been making the rounds since the 1950s isas follows: “The Ten Commandments contain 297 words. The Declara-tion of Independence has 300 words, Lincoln’s Gettysburg Address has266 words, but a directive from the government’s Office of Price Stabi-lization to regulate the price of cabbage contains 26,911 words.” Thetruth is the Office of Price Stability never made such a directive. Never-theless, the tale had such appeal, it remained alive despite the agency’sefforts to convince the public it was false. Even the dissolution of the Of-fice of Price Stability did not stop the story. It was merely modified sothat the directive was described as a “federal directive.”“' The storywould not die because of its irony and the plausibility of long-windedbureaucrats.
Elliott's Tale
The power of a good story may explain the enduring appeal of the ElliottWave Principle (EWP), one of TA’s more grandiose conjectures. The El-liott Wave Principle holds that price waves express a universal order andform that is found not only in the fluctuations of financial markets butthroughout the natural world, including the shapes of sea shells, galaxies,pine cones, sunflowers, and numerous other natural phenomena.According to EWP, market trends are fractal—a nested hierarchy ofwaves sharing the same form but ranging in magnitude and durationfrom microwaves that last only minutes to grand millennial macrowavesthat can last for thousands of years.” This shared form, called the Elliottwave, is an eight-segment configuration of rising and falling price move-ments. In fact this universal pattern of growth and decay is alleged to de-scribe not only the evolution of prices in financial markets; it is alsomanifested in the evolution of trends in mass psychology, the rise andfall of civilizations, cultural fashions, and other social trends. The theoryclaims to describe just about anything that goes through cycles ofgrowth and change. Even the business career of Elliott wave’s leadingadvocate Robert Prechter, according to Prechter himself, has followed aseries of ups and downs that conform to the Elliott Wave Principle. ThisThe Illusory Validity of Subjective Technical Analysis 61
all ties in with a sequence of numbers called the Fibonacci series andthe golden ratio phi, which does have many fascinating mathematicalproperties."°
However, that which purports to explain everything explains nothing.The Elliott Wave Principle, as popularly practiced, is not a legitimate the-ory but a story, and a compelling one that is eloquently told by RobertPrechter.*’ The account is especially persuasive because EWP has theseemingly remarkable ability to fit any segment of market history down toits most minute fluctuations. I contend this is made possible by themethod's loosely defined rules and the ability to postulate a large numberof nested waves of varying magnitude. This gives the Elliott analyst thesame freedom and flexibility that allowed pre-Copernican astronomers toexplain all observed planet movements even though their underlying the-ory of an Earth-centered universe was wrong. The analogy between themedieval astronomer fitting epicycle upon epicycle to their data and EWPanalysts fitting wave within nested wave to market data is strong. Thus,even if the fundamental notion of EWP is wrong, the method of analysiswill still be able to obtain a very good fit to past data.”
In fact, any sufficiently flexible model can fit a prior set of observa-tions with perfection. For example, a polynomial function with a sufficientnumber of terms (equal in number to the number of data points) can alsoproduce a perfect retrofit. However, a model or method with an unlimitedability to fit past observations but which cannot make testable (falsifi-able“) predictions of future observations is neither meaningful nor useful.
Though the Elliott Wave Principle is said to hold even the heavens,where galaxies conform to the logarithmic spiral, its performance here onearth has been less than stellar.” What then, explains its enduring appeal?I contend that it is attributable to the fact that EWP is a comprehensivecause-effect story that promises to decipher the market's past and divineits future better than any other TA method. Some stories are too good tolet die.
Stories Shaped by Self-Interest
Self-interest can motivate distortion in secondhand accounts. People withan ideological or theoretical position tend to selectively sharpen some as-pects of a story and minimize others to bring it into better alignment withtheir point of view. Purveyors of specific TA methods or of TA in generalhave clear ideological and financial interests at stake.
This charge can be leveled at me” or any author arguing a position.However, when the storyteller is constrained by objective evidence andrepeatable procedures, there is less leeway for the distorting effects ofself-interest to operate.G2 ~~ METHODOLOGICAL, PSYCHOLOGICAL, PHILOSOPHICAL, STATISTICAL FOUNDATIONS
CONFIRMATION BIAS: HOW EXISTING BELIEFS FILTEREXPERIENCE AND SURVIVE CONTRADICTING EVIDENCE
 
“Once a belief forms, we filter information in ways that sustain it.”” Theconfirmation bias is the tendency to view as credible new evidence thatconfirms our prior beliefs but to view as incredible evidence that contra-dicts them.” This tendency inhibits learning from new experience andstifles the elimination of incorrect ideas. The confirmation bias explainswhy we get stuck with erroneous beliefs.
The Confirmation Bias Has a Rational Basis
In many instances it is rational to give weight and preference to evidencethat supports an existing belief and to view with skepticism that whichcontradicts it. Beliefs would be highly unstable without such a rule.
The use of prior knowledge as an interpretive filter is a mark of hu-man intelligence, so long as the prior knowledge is well supported. Scien-tists were justifiably skeptical of a claim that nuclear fusion had beenachieved at room temperatures in an apparatus constructed from partsavailable at the local hardware store.” Their doubts were subsequentlyborne out by objective tests that were unable to reproduce the so-calledcold-fusion effect. Few of us would accept at face value the supermarket-tabloid headline: “Elvis Returns on UFO & Will Build an Alien ThemePark.” However, when prior beliefs are unjustified because they lack thesupport of sound inferences from solid evidence, it is not rational to grantthem the status of intellectual gatekeeper. The problem is that people areoften not aware of which of their held beliefs are unjustified. Conse-quently, the confirmation bias operates even when it should not.
Biased Perception
The confirmation bias is a consequence of the way perception works. Be-liefs shape expectations, which in turn shape perceptions, which thenshape conclusions. Thus we see what we expect to see and conclude whatwe expect to conclude. As Henry David Thoreau put it, “We hear and ap-prehend only what we already half know.” The truism, J’ll believe it whenI see it might be better stated I'll see it when I believe it.
The potent effect of expectations on perception was demonstrated inthe following experiment. When subjects were given a drink that theythought contained alcohol, but in fact did not, they experienced reducedsocial anxiety. However, other subjects who were told they were beinggiven nonalcoholic beverages when they were, in fact, alcoholic did notexperience reduced anxiety in social situations.”The Illusory Validity of Subjective Technical Analysis 63
Not only do we fail to perceive new information that is in conflict withprior beliefs, we are also reluctant to draw conclusions that are at oddswith what we already believe to be so. As a result we tend to accept atface value information that is consistent with pre-existing thinking whilewe critically scrutinize and discount information that is inconsistent withprior beliefs. The confirmation bias explains why our beliefs fail to changein response to new information as much as they should.”
It gets worse. The confirmation bias, operating in conjunction withthe laws of chance, predicts that erroneous beliefs will strengthen withtime and familiarity.” A TA method with no predictive power (e.g., a signalbased on a coin flip) will enjoy occasional success due to chance. Overtime, these confirming instances will accumulate and, because of the con-firmation bias, will be given greater weight than instances where themethod fails. The result is a vicious cycle of growing self-deception. Thissuggests that the belief in a flawed method’s efficacy will increase overtime irrespective of its actual merit. It also implies that TA practitionersmost experienced with a useless method will be the least able to recog-nize its flaws because of more lengthy exposure to the method’s chance-based successes.
Motivational Factors
The confirmation bias is also driven by motivational factors. TA practi-tioners have a large emotional and financial investment in their favoredmethod. This is especially true of practitioners whose professional livesare tied to a particular method.
There is also a strong motive to maintain consistency within our sys-tem beliefs and attitudes. The theory of cognitive dissonance formulatedby Festinger® contends that people are motivated to reduce or avoid psy-chological inconsistencies.” The discomfort provoked by evidence thatcontradicts what we believe makes it hard to digest such evidence.
Biased Questions and Search
The confirmation bias also slants the way questions are framed, therebybiasing the search for new evidence. This search bias increases thechance of encountering new evidence that supports the prior beliefwhile reducing the possibility of encountering nonconfirming or contra-dictory facts. This occurs in the context of subjective TA research. Bydefinition, it is confined to the search for supportive anecdotal exam-ples. Contradictory examples are difficult, if not impossible, to find be-cause Subjectively defined patterns do not specify the conditions of aprediction error.@4 METHODOLOGICAL, PSYCHOLOGICAL, PHILOSOPHICAL, STATISTICAL FOUNDATIONS
People trained in the scientific method do two things to combat thistendency. First, at the inception of a test, they establish objective criteriafor evaluating outcomes. Second, they actively pursue evidence that mightcontradict prior beliefs and assumptions. Scientists are guided by the no-tion that ideas that can survive a vigorous search for contradictory evi-dence have greater validity than ideas that are merely backed byconfirmatory evidence discovered by a search directed at exactly that.
The confirmation bias can occur in the context of objective TA aswell. Consider an analyst searching for profitable rules with back testing.If the first rule that is tested gives unsatisfactory performance, the searchfor a rule with good performance continues. This involves testing a se-quence of rules with altered parameters, logic, indicators, and so forth un-til a good one is found. This is data mining. Because the decision aboutwhen to end this process is entirely up to the analyst, the scope of thesearch is unbounded. This guarantees that ultimately a rule with goodpast performance will be discovered. The researcher’s initial belief that agood rule will be found is thus confirmed.
In fact, the past performance of a rule discovered by data mining over-states its likely performance in the future. This overstatement is called thedata-mining bias and is discussed in Chapter 6. This problem is not datamining per se. In fact, when done properly, data mining is a productive re-search method. The error is the failure to take into account the upwardbias caused by data mining. As will be explained in Chapter 6, by takinginto account the extent of the search that led to the discovery of the goodrule, it is possible to draw sound inferences about the rule’s future profitpotential.
How Vague Evaluation Criteria Contributeto the Confirmation Bias
Because subjective TA is vague about how its forecasts should be evalu-ated, evidence of its success and failure is ambiguous. This facilitates theanalyst’s ability to point to prior predictions that worked (confirmationbias) while at the same time preventing the identification of prediction er-rors. This effectively immunizes subjective practitioners from the nega-tive feedback that might cause them to change their beliefs."
Prediction errors of a subjective method can be obscured in a numberof ways. One is what I refer to as pattern renaming. An upside breakoutpattern that fails is relabeled a successful bull trap. According to TA doc-trine, upside breakouts are alleged to predict upward trends. This is illus-trated in Figure 2.12.
When an uptrend does not materialize it should be counted as a pre-diction error. If instead, the pattern is renamed a bull trap,*! we wind upThe Illusory Validity of Subjective Technical Analysis 65
     
PricePredictedOutcome
ActualOutcome
  
Time
FIGURE 2.12 Breakout failure.
with a successful signal from a different pattern as shown in Figure 2.13.Objective pattern definitions and clearly predefined evaluation criteriawould prevent such after-the-fact evidence fiddling.
Another way prediction errors are obscured is when forecasts lack aclear endpoint. The endpoint of prediction is a future time or event thatcalls for the prediction to be evaluated.. A forecast or signal that does
     
SuccessfulBull-TrapSignal
    
Time
FIGURE 2.13 Prediction error obscured with pattern renaming.GG METHODOLOGICAL, PSYCHOLOGICAL, PHILOSOPHICAL, STATISTICAL FOUNDATIONS.
specify or imply a clear endpoint is effectively meaningless. The talkingheads of TA typically issue predictions without clear endpoints: “I’m bull-ish for the intermediate-term.” This vague pronouncement provides theforecaster with enough postprediction wiggle room to avoid getting nailedwith a bad call. Either a defined time period or a specific subsequentevent, such as a certain percentage of adverse price movement, preventsthe forecaster from engaging in an after-the-fact, free-for-all hunt for anyevidence that portrays the forecast in a good light. However, the state-ment “I expect the market to advance at least 5 percent from current lev-els before it declines 5 percent” leaves no room for fudging. Objectivesignaling methods imply a clear endpoint—the subsequent signal to exitthe position.
The freedom to alter the forecast evaluation criterion after the factmakes it likely that supportive evidence will be found. This is preciselywhy science has a dual personality. It is flexible and receptive to alltestable ideas, yet rigidly orthodox about how testing and evaluation areto be carried out. In fact, much of what scientists do can be understood asthe use of strict procedures for determining when an idea is worthless. Ifpeople were to use similar procedures in their everyday lives, they wouldbe much less likely to adopt erroneous beliefs. People are highly adept atconcocting ideas, theories, and explanations for their experience thathave a semblance of plausibility.* However, they are not nearly as good attesting those beliefs once they have taken root. One of the biggest reasonsis the failure to precisely define which outcomes qualify as supportive evi-dence and which do not. Without objective evaluation criteria, the oppor-tunity and motivation to find supportive evidence for what we alreadybelieve is left unchecked and runs rampant.
The Confirmation Bias and Vague Evidence
The precise way in which the confirmation bias functions to substantiateprior beliefs depends upon the clarity of the new evidence. When the newevidence is vague, the confirmation bias operates unfettered. Becausevague evidence can be interpreted as either contradictory or supportive, itis simply taken as supportive.
Subjective TA methods are vague on two counts: with respect to howpatterns and signals are defined, and with respect to how predictionsbased on said patterns and signals are to be evaluated. This invites the dis-covery of evidence that is weakly supportive. Weak evidence is not strongenough to compel the belief that the method works, but because weak ev-idence is open to interpretation, it can be interpreted as being consistentwith a belief that the method works. The hallmark of weak evidence isthat it can be interpreted as being consistent with several different pointsThe Illusory Validity of Subjective Technical Analysis 67
of view. For example, the appearance of a certain portion of a price chartcould be consistent with a five-wave Elliott impulse pattern, or an entirelydifferent subjective pattern, or purely random price movement.™ Objec-tively defined patterns and evaluation criteria permit no such leeway. Ei-ther the data is an example of a particular pattern or it is not. Either theoutcome is consistent with the pattern’s prediction or it is not.
The Confirmation Bias and ClearlyContradictory Evidence
Let’s now consider how the confirmation bias operates when there is evi-dence that clearly contradicts a prior belief. In many situations, the evi-dence is a mixture. Some evidence clearly confirms the belief and someclearly contradicts it. In these situations the confirmation bias still oper-ates, but in a more complex manner.
It might be thought that the dissonant evidence would simply be ig-nored or twisted into being supportive. But, this tends not to happen be-cause people value seeing themselves as rational and cognitivelyconsistent. “They are reluctant to simply disregard pertinent evidence thatis contradictory in order to see what they expect to see and believe whatthey expect to believe.”* However, what they do is to alter the dissonantinformation in order to reduce its conflict with prior cherished beliefs. Inother words, the confirmation bias encourages subtle cognitive manipula-tions to the clearly dissonant evidence to reduce its importance and re-duce its clash with confirming evidence and cherished belief.
One way people discount discordant evidence is by applying aharsher standard of acceptance.** The standard applied to evidence thatsupports a favored position is the gentle requirement that it have a ring ofplausibility or the possibility of being valid. In contrast, the standard ap-plied to evidence that conflicts with cherished beliefs is that it must beconvincing beyond any possible doubt. For believers in faith healing, acolorful corroborating account is accepted without question. However, acontrolled scientific study denying the efficacy of faith healing would befaulted on any and every possible ground, reasonable or otherwise. By de-manding that dissonant evidence be so strong that it be compelling be-yond any doubt, while only requiring that harmonious evidence be weaklyconsistent, holders of erroneous beliefs are able to keep their faith alive.
One of the most surprising findings about the confirmation bias is thatevidence that contradicts a prior belief can actually have the effect ofstrengthening that belief. One would think that a mixture of pro and conevidence should at least reduce the strength of the prior belief. Studieshave shown otherwise. For example, in one experiment, subjects werepresented with clear and convincing evidence that was both pro and con@8 METHODOLOGICAL, PSYCHOLOGICAL, PHILOSOPHICAL, STATISTICAL FOUNDATIONS
capital punishment.*’ The subjects were of two types: those with a priorbelief that capital punishment was good and those with a prior belief thatcapital punishment was bad. Both groups were given summaries and cri-tiques to two different studies on capital punishment. One study pre-sented evidence showing that capital punishment was an effectivedeterrent against crime while the other provided evidence showing it wasnot effective.** The experiment showed that participants perceived thestudy that was consistent with their prior belief to be valid and importantevidence, whereas the study that conflicted with their view was seen asflawed research and weak evidence. After being exposed to evidence onboth sides of the issue, participants came away from the experiment withtheir prior beliefs strengthened. In other words a mixture of pro and conevidence caused the two groups to become more polarized.
It is also informative to consider what subjects in the study did not do.Hostile evidence was neither misconstrued to be favorable nor ignored.Rather, it was scrutinized for flaws, thus reducing its import. In otherwords, significant cognitive effort was expended to explain away or mini-mize contradictory evidence.”
An experiment that is closer to TA examined how the confirmationbias encouraged unsuccessful bettors to maintain their delusions ofgambling greatness despite swelling losses. Losing money would seemto be unambiguous evidence of failure, yet bad gamblers remained opti-mistic. Thomas Gilovich showed they accomplished this by evaluatingtheir wins and losses in a biased manner.” As was true for subjects inthe study on capital punishment, the gamblers did not forget or ignorediscordant evidence (losses). Rather, they applied significant cognitiveeffort to transform their losses into less derogatory evidence. This wasdisplayed in journals kept by the gamblers. It was found that they de-voted more commentary to losses than gains, and gains and loses wereinterpreted differently. Gains were easily attributed to the gambler’s bet-ting acumen (self-attribution bias) whereas losses were attributed tobad luck and, with a bit of fine tuning to the betting system, would havebeen wins.
These findings predict how subjective TA practitioners might react ifpresented with objective evidence contradicting the validity of a favoredmethod."! For example, suppose a subjective method was to be trans-formed into an objective method, and tests indicated the method was noteffective. It is likely that devotes of the method would find any number ofgrounds to criticize the study. There is no study in any field of science thatcannot be criticized on some grounds. It is also likely that the subjectivepractitioner would trot out cherry-picked examples showing instanceswhere their method was successful. In the end, it is probable that thepractitioners would come away from the exercise more convinced thanThe Illusory Validity of Subjective Technical Analysis 69
ever in the value of their method while muttering about ivory-tower acad-emics having their heads stuck in the clouds or somewhere worse.
Beyond the Confirmation Bias: The True Believer
We have seen that erroneous beliefs thrive on vagueness and can evengrow stronger in the face of evidence that would, at the very least, call forreduced belief. However, belief longevity goes beyond even this. Studieshave shown that once a belief takes root, it can even survive a completediscrediting of the evidence that gave rise to the belief in the first place.
It has been demonstrated that, when subjects are tricked into formingan erroneous belief, their belief survives even after they are told that theyhad been tricked. One study is particularly relevant to TA because it in-volves pattern discrimination. Subjects were asked to distinguish authen-tic suicide notes from fictitious ones.” Initially, experimenters gave thesubjects fake feedback, thus deceiving them into believing that they hadlearned to discriminate authentic suicide notes from fakes. In reality, thesubjects had not learned how to perform this task. Later, the experi-menters told the subjects of the deceit. Even with such clear discreditingevidence, the subjects continued to believe, to a considerable degree, thatthey were able to discriminate real from fake suicide notes. Other experi-ments conducted along similar lines have found the same effect: a beliefcan survive a total discrediting of its original basis.
These findings predict how believers might react if Ralph Elliott, W.D.Gann, or Charles Dow were to return from the grave and announce thattheir methods had been intentional scams. It is likely that many current-day practitioners would continue to believe. Given that Elliott wave analy-sis, or at least one version of it, has now been reduced to an objectivealgorithm, it will be interesting to see the reactions of EWP believers if ob-jective tests fail.”
Subjective Methods Most Likely to Sufferthe Confirmation Bias
Some subjective TA methods are more likely to encourage the confirma-tion bias than others. These methods will possess three characteristics:(1) an elaborate causal explanation or compelling story about why themethod works, (2) high retrofit power—the ability to fit or explain pastmarket behavior accurately, and (3) no ability to generate falsifiable(testable) predictions.
TA methods fitting this profile include Elliott waves, Hurst cycle the-ory, astrology-based forecasting, and W.D. Gann analysis, among others.For example, the Elliott Wave Principle is based on an elaborate causalZO = METHODOLOGICAL, PSYCHOLOGICAL, PHILOSOPHICAL, STATISTICAL FOUNDATIONS
explanation invoking universal forces that shape, not only the physicalworld, but mass psychology, culture, and society as well. Moreover, it hashigh retrofit power. By employing a large number of nested waves that canvary in both duration and magnitude, it is possible to derive an Elliottwave count (i.e., fit) for any prior segment of historical data. However, ex-cept for one objective version” of Elliott waves, the method does not gen-erate testable/falsifiable predictions.
Let’s consider the first element, an elaborate causal explanation. TAmethods that are based on intricate causal stories are able to withstandempirical challenges because they speak to the deeply felt human need tomake sense of the world. Because we are compelled to explain our experi-ence, we have highly developed abilities to generate plausible stories afterthe fact. “To live, it seems, is to explain, to justify, and to find coherenceamong diverse outcomes, characteristics and causes. With practice wehave learned to perform these tasks quickly and effectively.” Studies inwhich people are encouraged to form erroneous beliefs and then re-quested to construct rationales for those beliefs are more resistant to be-lief change than subjects who were not asked to formulate explanations.”Subjects who developed reasons to explain their beliefs became so stuckin their opinions that, even after they were told that they had been manip-ulated into adopting a false belief, they continued to believe.”* In fact, theycontinued to believe almost as strongly as other subjects who were ma-nipulated to form false beliefs but were not told of the manipulation.
The second and third elements that make a TA method immune to evi-dentiary challenge is a high capacity to retrofit past market movements com-bined with an inability to make testable (falsifiable) predictions of futuremovements. The ability to bring all past market movement into conformitywith the method has the effect of eliminating any contradictory evidence.When forecast errors do occur because outcomes are so completely out ofwhack with forecasts that even subjective evaluation is unable to hide the er-ror, the standard explanation is that the error was caused by a misapplica-tion of the method rather than a flaw in the method itself. This fallaciousreasoning is then supported by reapplying the method so it fits the discor-dant outcome. The ability to always obtain a good retrospective fit combinedwith the inability to make testable predictions eliminates the possibility thatany evidence will ever surface that contradicts the method.
In science, the rationale for eliminating an erroneous theory is thefact that its predictions of future observations are shown to conflict withthose observations. This is the scientist’s signal that the theory needs tobe eliminated or reformulated. If the latter, the new version of the theoryis then tested against a subsequent set of future observations. This essen-tial mechanism for pruning away false theories is illustrated in Figure 2.14and is discussed in depth in Chapter 3.The Illusory Validity of Subjective Technical Analysis 71
 
Theory
 
yvPrediction
 
 
 
¥ Revise orPrediction Abandon Theory
Compared withNew Observation
 
 
 
 
 
     
Agreement or Conflict? Conflict
AgreementProvisional Acceptance of Theory
FIGURE 2.14 How science eliminates bad theories.
The entire motivation for revising or abandoning a TA method, or anytheory for that matter, comes from seeing clear examples where its pre-dictions are wrong. If it is easy to make after-the-fact adjustments thateliminate all errors, the rationale to abandon the method is lost.
Other research suggests that some people are more prone to the con-firmation bias than others. Strangely, they are the most intelligent people.Harvard psychologist David Perkins conducted an interesting study show-ing that the higher a person’s intelligence (measured in IQ points), the bet-ter they are able to construct articulate rationales for their beliefs anddefend them.” However, Perkins also found that because of their strongability to rationalize existing beliefs, highly intelligent people are less ableto consider alternative explanations and points of view. Hence they aremore apt to form beliefs that are resistant to change. Social scientist JayStuart Snelson calls this ideological immunity