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In trading, smart people at least sometimes do stupid things.
Some stupidity can be prevented if diagnosed mindfully on time - obvious errors resulting from lack of information, momentary lapses, fatigue, and simple ‘‘under performance’’ executions, or trading during uninteresting phases.
Impulsiveness results from failure to postpone gratification.
Some stupidity has to be taken in context - all behaviors occur in an enormous variety of contexts and situations.
In 'The Mentality of Apes' by Wolfgang Köhler he has identified three kinds of errors:
1. ‘‘Good errors.’’
2. ‘‘Errors caused by complete lack of comprehension of the conditions of the task.’’
3. ‘‘Crude stupidities arising from habit.’
At times a patently smart person can blunder or go badly astray. Think of Rogue Traders.
With hindsight, we can find several indications that should have alerted us to the fallacy of our notions.
One fact emerges about winners in the market: With each person mindlessly assuming that the others had mindfully looked into the important details, it turns out that only the person who had actually done the obvious, mundane checks relevant to the domain succeeds long term.
Many acts of stupidity, result from mindlessness. While this seems trivially obvious, because of the limitations of controlled processing, we cannot be mindful of all our actions. Indeed, the overwhelming activity of the brain and cognitive processing occurs outside of conscious control. Some aspects of wisdom and expertise are prototypically automatic, unconscious and ‘‘mindless.’’ To preserve our limited mindful processing capacity for important matters, we have no choice but to automate as many mundane processes as possible. Intelligence / wisdom might consist in knowing what to be mindful about and when to delegate processing to mindlessness.
IT IS UTLIMATELY the beliefs that make smart people dumb— beliefs that make them do dumb things, and also cause them to fall behind intellectually over time. Why people who have all the ability one could wish for often don’t use it when they need it most and can even lose it. many smart people become too invested in being smart. They think of smartness as something that they have and others don’t—as something that makes them special and worthy. As a result, they become too focused on being smart and looking smart rather than on challenging themselves, stretching and expanding their skills, becoming smarter. In other words, they focus on the trait of intelligence and on proving that they have it, rather than on the process of learning and growing over time.
As Carol S Dweck states in her book MINDSET one of the dumbest things people with the fixed view of intelligence do is to sacrifice important learning opportunities when those opportunities contain a risk of revealing ignorance or making errors. Of course, the very idea of learning implies that there is something you don’t already know. Yet people who hold the fixed view of intelligence feel they cannot afford to reveal their ignorance and make errors because, as we saw, this can call their intelligence and even their worth into question.
Many people who hold the fixed view of intelligence hold yet another belief that makes them do dumb things. It is the belief that if you’re truly intelligent, you don’t need effort.
Both these practices dilute the meaning of 'smart'. The more I think about it, I can sum up in one sentence 'There is no substitute for hard work.'
All traders have all had the experience of doing something in the heat of the moment that we regretted later. Our mouse clicks flew out of our hands before we could catch them. It’s like our rational mind stopped and what came out surprised us. You ended up saying “How could I do that, what could I have possibly been thinking?”
Well in reality you weren’t thinking you were overwhelmed with an emotional reaction. This is your mind hijacking you.
The “amygdala hijack” is a term coined in Daniel Goleman’s Emotional Intelligence.
The amygdala is the emotional part of the brain, which regulates the fight or flight response. When threatened, it can respond irrationally. A rush of stress hormones floods the body before the regulating prefrontal lobes can mediate this reaction.
The stimuli comes in from the eyes or ears and goes immediately to thalamus and it then goes right to amygdala before a signal reaches the neocortex. This survival mechanism lets us react to things before the rational brain has time to mull things over. The hair trigger amygdala though can be sloppy and distort things in this quick reaction.
The amygdala in animals can respond to a perception in as little as twelve thousands of a second.
Any strong emotion, anxiety, anger, joy, or betrayal trips off the amygdala and impairs the prefrontal cortex’s working memory. The power of emotions overwhelms rationality. When the amygdala is active with blood and oxygen, there is less activation in the prefrontal cortex. Our thinking power is disrupted and there are deficits in our problem solving
Self- Management: The Solution
The good news is this loss of IQ points is temporary. Self management is a trader’s ability to be aware of what they are
experiencing as another data set of information and be able to accept, manage and adjust to their emotions.
Traders who fail to develop self-awareness risk falling into an emotionally draining routine that also threatens their account balance and livelihood.
The number one tool is to first identify or label the feelings as a third person. For example, “You must be very sad about your loss,” Labeling these feelings helps reduce their intensity and return some of the activity back to the prefrontal cortex and thus more cognitive control. This identification can help the individual accept and normalize what they are feeling. The feelings are cognitively reappraised or reframed and thus less aroused. This is called “affect labeling.”
So one way to gain back your lost IQ points is to label the feelings. Name the feeling, normalize it and nurture a direction or action.
If you are feeling “triggered” by something ask yourself the questions that follow - wait 5 seconds till you get answer to each question. To build your self-awareness and self-management do this numerous times during the day.
The first two questions access and label your thoughts and emotions. The third question makes conscious your intentions. The fourth question evaluates your actions in line with your intentions. Patterns of how you get in your way may emerge. The last question takes in all this new conscious data and allows you to better direct your brain and actions for the goals you want.
1. What am I thinking? (Basal ganglia- feelings, thoughts and movements).
2. What am I feeling? (Basal ganglia- name it to tame it – labeling affect.)
3. What do I want now? (Cerebellum – connects to Prefrontal Cortex, cognitive integration).
4. How am I getting in my way? (Prefrontal Cortex – learning from mistakes.)
5. What do I need to do differently now? (Prefrontal Cortex – 'boss supervision' and viewing the setting, leading to insight!)
The Anterior Cingulate Gyrus is the brain’s gear shifter– it sees options - and moves from one idea to another idea. That is the goal of these questions.
We all get hijacked at times, but great traders know themselves well, anticipate situations that may be stressful for them and take preventative measures. In the stressful moment, they know what they are feeling AND thinking. They then have multiple constructive solutions to handle the amygdala hijack and maintain their top performance.
And herein lies the rub. We're likely contending with hard-coded biological processes. I don't care how much meditation and yoga someone does--if they're being "Chased by a tiger", it's going to be difficult for them not to "Freak out", or do something irrational.
...I don't mean to imply it can't be done, and clearly some people have an easier time than others. But for those who struggle (And really, this can be all of us at one point or another), relying solely on mind-training to address the consequences of natural biological processes for an everyday activity, as opposed to say, a special mission, is to my thinking an uphill battle, if not a dangerous proposition.
Thanks iqgod for your thought-provoking commentary!
I don't know if I'd consider that mind-training. Seems like great questions to ask yourself from time to time. I write myself sticky notes on a weekly basis with a thought, question, or idea. These are usually quick notes that have something to do with me becoming a better version of myself than I was the previous week, month, year.
I think if there was to be a graph of intelligence/smartness of an individual, I don't think it stays always static and in fact is more like a sine wave. It can be up and down, especially when it is in uncharted and not so habitual but demanding territory or simply in a area where it can be overcome by other emotions of individual.
Examples: Love, anger, fear, greed etc
I think people are always under the influence of some kind of bias from one or more factors from above and their intelligence can easily get influenced. This is also why I think people who have some kind of other discipline where they had to train themselves to control emotions and at least make discipline based changes or have to follow plan to T, usually do okay in trading.
Some example from sports here since I find it relevant, in a premier league, England always had massively talented players and they also played against the top players around the globe since it has been number 1 league for sometime now, but it never translated to the world cup win in last 4-5 decades, reason?
They had the talent, they had the experience, they had the best resources, but they didn't have the "temperament" to win in the big match situation of FIFA world cups.
Temperament here is very loose word, I think of it as ability to control ones emotions and allowing ones intelligence to take over to play the situations rather than allowing situations to play your emotions and through it your intelligence and decision making.
I hope that made any sense, I'm on too much coffee right now
