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However, as I try to remind the kids - Smart is good. Smart is important. But always remember that there is a difference between being smart, and being wise.
Cognitive biases are very useful to understand. To have a better grounding in why, and, more importantly for traders, how they are important one should have a basic understanding of the dual process model for thinking - the so-called "system 1 and system 2" popularized by Daniel Kahneman. Avoiding the negative effects of cognitive biases involves using system 2 and that takes time, energy (willpower), and specialized knowledge. One thing that most popularizers of Kahneman's work (cited above plus daniel arielly and several others) miss is that Kahneman feels that system 1 (loosely related to "gut-feeling") is often the more important of the two systems. He states in "thinking fast and slow" that system 1 is the hero of the book - this is a point worth understanding.
Some biases that are worth looking up on wikipedia are:
conjunction fallacy
loss aversion
Recency bias
Confirmation bias
The most important cognitive bias problem in trading is the tendency to maximize the chance of gain rather than gain. Traders will delude themselves via all cognitive biases available to convince themselves that the decision resulting in the highest chance of gain is the right decision. The action leading to the highest chance of gain is most often the action correlated with the lowest expectancy.
Seek freedom and become captive of your desires. Seek discipline and find your liberty. - Frank Herbert
The human brain is a weird old thing. When confronted with a new, uncertain situation, it virtually always abandons careful analysis, and instead resorts to a host of mental shortcuts—that almost always lead to the wrong answer. Turns out, the smarter you are, the more likely you are to make such mistakes.
-------------- When confronted with a new, uncertain situation
or perhaps stress situation.
I think in futures trading with the high leverage and high manipulation of the markets,
there is something about the microfocus combined with our preconception of what will happen before the day begins that creates mental blind spots - tunnel focus.
Today I was looking at the ES trying to decide the exact moment it would turn up - so sure I was that it would stop falling somewhere around 1338.
Yet at the end of the day, I saw tons of obvious things
weekly up trendline broken.
I was entering though the price has not crossed the SMA,
etc.
Its like blinkers come down and the stress of the trade blocks out obvious things
That's likely to be confirmation bias at work. If have a strong opinion you will look for evidence to support it, which, once found, convinces you all the more. My personal trick is to put my 'idea' in the witness box and take on the role of a prosecuting lawyer. Question the idea on the facts and see if it stands up.
For me 'gut feeling' is an excellent source of information, but I do not trust in it blindly. I try to identify if any nervousness is down to real threats to a trade signal or open trade (i.e. something has changed that will potentially overturn my idea) or am I just anxious. If, after a stop and check, it is the later I try to over-ride and press on with the trade/hold it. Not easy to do.
Trading is difficult for intelligent people because they think in terms of multiple results and outcomes.
They consider so many "if" scenarios that you could crate a binomial diagrams with 100 branches in a minute.
"if price does...then I will...and if it does...I will...." Naturally, they are right in terms of where the price would get at times, however not how. At times having looking at so many scenarios leads to complete paralysis as well.
This entire ball and bat price example is not indicative of intelligence at all. It's just an initial reaction...you just need to think another 20 seconds to get it right.
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I see the potential value of the thread in mad lye original idea
"Is there something we can apply to trading?"
This is why I highlighted that it applies to quick decisions in unusual or stressful situations.
To simply label something -- that's cognitive dissonance and give an example action in slower markets and not as manipulated really closes the thread down. I knew what kind of dissonance it was before posting. Try the ES and see how well sitting in judgement works.
The article is about quick decsions.
---------
The bat and ball example isn't aboutsmart or stupid - it's about a quick decision under stress (at least in trading for one can't say unusual - we do it every day. AND it isn't stressful if you have a huge bankroll, another source of income and are trading a slow-moving market as a hobbiest.)
If someone pointed a gun at you and said "Quick! a bat and ball cost...."
If you answer too slowly or incorrectly you will be shot, then smart or not - Princeton or not -- 50% get it wrong.
To get value out of the thread we need to open our minds.
I trade 15 and 60 min timeseries so I suppose the 'gun at my head' scenarios is fairly rare. I've tried the 5 minute and I'm not comfortable making decisions that fast (yet). I still use ( and must say couldn't trade without) a check list for each and every entry. That is my opportunity to test out the set-up hopefully without my biases coming into play that much.
