When you were younger, did you usually see some shapes or faces in the clouds exclaiming, "Look, that looks like a heart!" Even now, we sometimes see them. Or when you go on road trips, have you ever commented on the outline of some rocky hills that it looks like an animal or a certain shape? Well, this is completely normal because the human brain tends to create patterns and rules even if they do not exist. Technically, this is called the "Clustering Illusion": the cognitive bias of seeing a pattern in what is actually a random sequence of numbers or events. (Clustering Illusion, 2018)
Although there is nothing wrong with seeing bizarre shapes in clouds or rocks, the clustering illusion is capable of interfering with our rationality and thus, it can lead us to make illogical decisions. Let me give you an example by telling a short story. In 1994, Diane Duyser from Florida sighted the face of the Virgin Mary in her slice of toast after biting into it. She stopped eating at once and placed the "extraordinary" toast in a container. Fast-forward to November 2004, the toast – which was apparently well-preserved – was put on auction at eBay, earning her $28,000. (Dobelli, 2013)If you asked me, I would say that the person who bought the 10-year-old piece of toast with a bite on it was more deluded by clustering illusion than Diane Duyser. But who am I to say? I'm not perfect either.
Many similar stories like this happen frequently. All in all, clustering illusion churns out the superstitious beliefs in people which in turn overwhelms their skepticism and logic. On a larger note, things are far more grave and byzantine when clustering illusion takes place in the financial markets. Consider the mountains of data and numbers being dealt with in such an industry. The tendency for investors to seek out patterns or trends in these numbers is highly likely. Although, this is not always the case but it can cause them to make rash investment decisions, resulting in drastic financial implications. For instance, an investor might believe in a trend when he looked at a sample of four days indicating that the stock markets went down, down, up, up. (Clustering Illusion, n.d.)In reality, there was no trend at all; it was based on randomness. The truth is, our brains sometimes cannot accept the sheer randomness as it is. Instead, we tend to associate the randomness to a certain sequence of events or a trend – it is as if we are trying to connect the invisible dots.
To sum up everything, we cannot be too quick in confirming and recognizing a certain pattern. We always need to reclaim our senses, rationality, and skepticism whenever we look at an unusual event or we are about to make an important decision because things do not usually happen within our control or our ability to understand instantly. They happen by chance and often without making any sense. However, I am not saying to let go of your beliefs or intuitions or even tell you not to observe trends and patterns; I am merely reminding to be precautious of clustering illusion when making decisions.
Clustering Illusion. (n.d.). Retrieved from CFI: https://corporatefinanceinstitute.com/resources/knowledge/other/clustering-illusion/
Clustering Illusion. (2018, June 18). Retrieved from Rational Wiki : https://rationalwiki.org/wiki/Clustering_illusion
Dobelli, R. (2013). The Art of Thinking Clearly. United Kingdom, United States: Sceptre (UK) Farrar, Straus, and Giroux (USA).