Pattern Recognition vs. Narrative Fallacy (Part One)

What criminal prosecutors and day traders have in common — and why both can be spectacularly wrong

Candlestick trader chart meets a Rorschach test — perfect illustration of how easily we project patterns onto noise, in trading and in courtrooms alike

For some months now, I’ve been looking toward my potential future retirement.

Now, to all you prosecutors out there, don’t get excited. I have no idea exactly when I’m going to retire. It could be next year, it could be in five years. But I do think it will be “whenever I’m ready”. And that could be soon. Even I don’t really know.

Part of getting ready is going back over my finances.

That led me to moving some things around. You see, as to my investments, I’ve always been a “set it and forget it” kind of guy. I’m not going to get into details of my finances, but I decide it was time to take a more hands-on approach and I began reallocating some things.

Already, there are some significant improvements. It turns out I have a knack for research.

Who knew?

But that has led to the acquisition of some nice long-term stocks. It won’t surprise any regular reader here, I don’t think, but there are a few AI-related stocks in the mix.

It also turns out that I have a knack for reading patterns. And I love problem-solving and games. (Again, who knew?)

So I took a smallish amount of my money (less than 1%) and — after some reading and watching without playing and finally dipping in my toe this week — found that I have some good instincts for day trading.

Humans Are Wired for Patterns — Even When None Exist

Day trading is mostly about being able to spot patterns. Do a quick Google search — or start reading intensely about day-trading theories as I’ve been doing lately — and you’ll learn all kinds of cute names like “cup and handle” or “bull flag”, “falling wedge”, “rounding bottom” and so on.

Looking to trade a little PG? Too bad you can’t spot the head and shoulders in advance!

Pattern-spotting is an important skill for day trading. And I’ve hinted a little bit before about how humans are wired for pattern recognition.

In one Substack article, I wrote about how machines don’t “hallucinate”; they confabulate. I explained the difference between hallucinations and confabulations.

A “hallucination” is what happens when you are driving at night from Visalia to Hanford and you see a bush in the fog along Highway 198 and think it’s a bear. Until you realize there’s no way in hell there’s going to be a bear at that location. “Hallucination” is when you think you’re actually really seeing something, hearing something, smelling something, or perhaps even feeling something that isn’t there.

— Rick Horowitz, The Mirage of Reasoning Machines: The danger of trusting computer-generated charisma over proof (September 10, 2025)

But why does this happen?

Technically, this isn’t a hallucination per se.

[P]areidolia [is] a psychological phenomenon where random stimuli prompt the recognition of familiar patterns, especially faces or objects. This experience is not just a trick of the mind; it a fundamental part of human cognition, revealing our innate tendency to seek order in chaos.

— TOI Lifestyle Desk, Explained: What is Pareidolia and why this phenomena is so fascinating (April 14, 2024)

This explains, among other things, the human tendency to see faces pretty much everywhere, including the surface of Mars — which explains why Elon Musk is so anxious to get there: he’s hoping to find at least one friend, one person in the Universe who might actually like him.

Pareidolia is also why we see animals in clouds, as Prince Hamlet famously demonstrated.

HAMLET Do you see yonder cloud that’s almost in
shape of a camel?
POLONIUS By th’ Mass, and ’tis like a camel indeed.
HAMLET Methinks it is like a weasel.
POLONIUS It is backed like a weasel.
HAMLET Or like a whale.
POLONIUS Very like a whale.

— Folger Shakespeare Library, Hamlet, Act 3, Scene 2

Researchers into pareidolia theorize this “ability is a holdover from ancient times when the ability to discern a threat was vital to the survival of early humans.”

I think this “ability” is informed, also, by our own individual worldviews. In courtrooms, prosecutors and police — and not infrequently judges — will argue that perfectly normal and innocent behavior is demonstrative of criminal intent. A “suspect”, also now known as “the defendant”, was sweating on a hot summer night when stopped by the police. In addition to this sign of nervousness and up-to-no-goodness appearance, he glanced around. (Often, the police will add “furtively”, but that’s just embellishment intended to gaslight jurors.) Speech is slurred. Eyes are bloodshot and water.

Would it surprise you if I told you that sometimes there is bodycam video from the cop’s own camera that shows none of this? It’s just a specialized law-enforcement form of pareidolia.

In court, prosecutors cling to these imagined storylines. In trading, novices see breakouts that aren’t breakouts, trends that aren’t trends, and reversals that aren’t reversals.

Before I move on — I’m curious. Do you see these kinds of false patterns in your own world? Trading, work, politics — anywhere. Drop a comment. I actually read them.

Traders Build Stories. Prosecutors Do Too.

Once pareidolia has taken root, the tree grows. Maybe into a bear. Or maybe it’s bullish. This is because confirmation bias takes over in those not on guard for the threat it carries.

Novice traders begin to cherry pick “indicators” that support what they want. It might be that they want a particular stock to move a particular direction. Or maybe they just want a quick score. In their desperation, they think they’ve spotted one. Confirmation bias is happy to take over.

And lead them to their doom.

In the courtroom, prosecutors — who bear the burden of proof beyond a reasonable doubt — will cherry pick “facts”. Some of these facts, as I already mentioned, are just normal behaviors. But those behaviors get woven into what seems on the surface to be a coherent story. Jurors may fall for it just because it sounds coherent. It “makes sense”. And, of course, the prosecutor and maybe even his witnesses are so certain.

We all crave order. When the world tilts toward chaos — whether it be politically, technologically, or personally — certainty feels like a handrail. A calm, authoritative voice can do more to settle nerves than any mountain of evidence. We trust the people who sound sure of themselves: the surgeon who says, “We’ll fix this,” the criminal defense lawyer who says, “I’ve seen this before,” the politician who says, “Believe me.”

Certainty is anesthetic. It dulls the discomfort of doubt, the ache of ambiguity. You don’t have to wrestle with probabilities if someone else already has, or at least sounds like they have. The performance of confidence is often enough.

— Rick Horowitz, The Sound of Certainty: How We Mistake Confidence for Truth (November 10, 2025) (complete with a song written and sung by the author!)

When speaking to judges — especially when trying to make sure an unconvicted person who, if he will just give in and plead guilty will be released from jail, doesn’t get released unless or until he “confesses” — prosecutors will cherry pick coherence from police reports to argue against bail. Judges will ignore the pits to put the cherry on top because it’s what they wanted, too.

Confirmation bias says nearly all defendants must be locked up if they can’t afford the often exorbitant bail and leads them to their doom.

Innocent people who won’t confess slow the system down.

The Seductive Power of a Clean Story

And so it goes. The seductive power of a clean story greases the conveyor belt. For traders, it conveys their money to those more savvy. Having intoned “The chart is signaling strength”, they kiss their money goodbye. Prosecutors’ stories grease the conveyor belt of “justice” as they similarly intone “The defendant is lying”.

Prosecutors use visual simplicity the way traders misuse patterns: as proof, instead of persuasion

Both claims built on inference, not real evidence. As I said above, brought into existence by pareidolia, they are brought to life by confirmation bias, coherence, and certainty. The narratives feel strong because they reduce uncertainty, not because they reflect reality.

The trades are made. Money for dreams of riches for wannabe day traders; the defendant’s life for dreams of glory for wannabe prosecutorial gladiators.

At least the day traders are sacrificing their own money (usually). Prosecutors unthinkingly sacrifice the lives of people who are — much more often than most people believe — innocent.

So let me pause here.

Everything up to this point — pareidolia, confirmation bias, the prosecutor’s tidy narrative, the trader’s tidy chart — is the prelude to the real danger. The danger isn’t just that humans see patterns where none exist. It’s what happens next when the legal system locks those mirages into place and calls them “evidence.”

And that’s where things get ugly.

In Part Two, I’ll walk through what actually happens when these cognitive shortcuts hit the courtroom at full speed: the eyewitness errors, the hidden brain, the noise, and why innocent people get convicted even when everyone involved thinks they’re doing the right thing.

If you’ve ever wondered how a shadow in the fog becomes a “positive ID,” or how one stray candle becomes a “breakout,” that’s where we’re heading next.

If you want to nudge this series in a particular direction as it develops, tell me in the comments. I read all of them, and they shape what I write next. Parts One and Two were originally one piece, but it ran long, so I split it. At least two more articles are planned for this series after the Part Two split.