Once again, Jonah Lehrer has an article in Wired magazine relevant to trading, in We are All Talk Radio Hosts:

Let me tell you a story about strawberry jam. In 1991, the psychologists Timothy Wilson and Jonathan Schooler decided to replicate a Consumer Reports taste test that carefully ranked forty-five different jams. Their scientific question was simple: Would random undergrads have the same preferences as the experts at the magazine? Did everybody agree on which strawberry jams tasted the best?

Wilson and Schooler took the 1^st, 11^th, 24^th, 32^nd, and 44^th best tasting jams (at least according to Consumer Reports) and asked the students for their opinion. In general, the preferences of the college students closely mirrored the preferences of the experts. Both groups thought Knott’s Berry Farm and Alpha Beta were the two best-tasting brands, with Featherweight a close third. They also agreed that the worst strawberry jams were Acme and Sorrel Ridge. When Wilson and Schooler compared the preferences of the students and the Consumer Reports panelists, he found that they had a statistical correlation of .55. When it comes to judging jam, we are all natural experts. We can automatically pick out the products that provide us with the most pleasure.

But that was only the first part of the experiment. The psychologists then repeated the jam taste test with a separate group of college students, only this time they asked them to explain why they preferred one brand over another. As the undergrads tasted the jams, the students filled out written questionnaires, which forced them to analyze their first impressions, to consciously explain their impulsive preferences. All this extra analysis seriously warped their jam judgment. The students now preferred Sorrel-Ridge—the worst tasting jam according to Consumer Reports—to Knott’s Berry farm, which was the experts’ favorite jam. The correlation plummeted to .11, which means that there was virtually no relationship between the rankings of the experts and the opinions of these introspective students.

What happened? Wilson and Schooler argue that “thinking too much” about strawberry jam causes us to focus on all sorts of variables that don’t actually matter. Instead of just listening to our instinctive preferences, we start searching for reasons to prefer one jam over another.  For example, we might notice that the Acme brand is particularly easy to spread, and so we’ll give it a high ranking, even if we don’t actually care about the spreadability of jam. Or we might notice that Knott’s Berry Farm has a chunky texture, which seems like a bad thing, even if we’ve never really thought about the texture of jam before. But having a chunky texture sounds like a plausible reason to dislike a jam, and so we revise our preferences to reflect this convoluted logic.

And it’s not just jam: Wilson and others have since demonstrated that the same effect can interfere with our choice of posters, jelly beans, cars, IKEA couches and apartments. We assume that more rational analysis leads to better choices but, in many instances, that assumption is exactly backwards.

In trading, as in judging jams and jellies, overthinking can result in an inferior decision.

Just today, I received an email from a trader who wanted some mentoring.  He had already devoured 18 different books on trading. It’s hard to know where to start. How does one reconcile the conflicting advice from so many different “experts?”

At some point, you just have to pull the trigger and start trading. Too much left-brain analysis and thinking will only make it harder to figure out what to do. That’s one of the major reasons that simple trading ideas work best. There is less room for overthinking and less potential for the paralysis of analysis to set in.

If you want to be a great trader, you need to start trading. Start small at first, but just start trading. Books and advice only get you so far. You’ll need experience with your own trading to know how to apply the advice from experts.

One of the reasons that I decided to switch publishers to Financial Times Press is that they seemed much more innovative and willing to take risks. Publishing is undergoing tectonic chaos. So publishers are going to need to take risks to survive the inevitable catastrophes, so I was pleased to see that they are offering a very interesting promotion for the Kindle version of Trading From Your Gut starting on Monday. The Kindle version will be free for the entire workweek, 8/9 through 8/14.

Yes, that’s right. Free.

Please spread the word.

This is a bold move and one that has seen surprising benefit in actual practice. Any readers of Seth Godin’s blog will note that he was an innovator in this sort of seemingly counter-intuitive practice.

One of the blogs I read regularly is Seth Godin’s Blog, Seth often talks about what is changing in business and the world (another good blog in the same vein is Umair Haque’s blog).

In a post today, Seth talks about how business has become like a race. The race is speeding up, so that means that less and less of the information on which you base your decisions will be reliable. In short, the uncertainty of the decisions in business is rising.

Seth correctly notes that:

If you’re racing, you better figure out what to do about the times that you don’t know for sure…because more and more of your inputs are going to be tenuous, speculative and possibly wrong. Day traders have always understood this–all they do is trade on uncertainty. But you, too, if you’re racing, are going to have to make decisions on less than perfect information.

This paragraph notes a core issue from my second book, “Inside the Mind of the Turtles: Inside the Mind of the Turtles: How the World’s Best Traders Master Risk“. I hate the title and fought with McGraw-Hill for months to get it changed to no avail, but the message of the book is a good one. This second book was NOT a trading book, it was a book targeting a wider audience that shows how the lessons of trading can be applied to circumstances beyond trading. It is a book about about managing risk and uncertainty; and making decisions with, as Seth puts it, “less than perfect information.” I wanted to call it: “Risk Rules: How to make decisions when you don’t know what the future will bring.”

Seth notes in his post that in order to make good decisions, it sometimes pays to give up being first in order to make sure you are right:

Rule of thumb: being first helps in the short run. Being a little more right than the masses ultimately pays off in the long run. Being last is the worst of all three.

One of the harder lessons to teach new traders is patience. To trade well, you need to have enough information to know that you have an edge. Sometimes this means that waiting is your best option. Unless a trading opportunity with an edge presents itself, you don’t want to be in the market.

That’s the core take-away from Seth’s blog post today. Being quick is good, all else being equal, but being quick and wrong is not good. Better to be slightly more patient and right more often.

Futures Magazine has just published a review of Trading from Y0ur Gut. It is available online here.

Yet again, Jonah Lehrer has an interesting article, Implicit Learning,  which discusses intelligence and the human brain.

What he’s calling Type 1 and Type 2 intelligence map directly to what I refer to as Right-brain and Left-brain thinking. His conclusion is most interesting:

Needless to say, these results raise a ton of interesting questions. The one I’m most interested in is whether or not these Type 1/implicit learning skills can be improved over time. While numerous studies have demonstrated that experience can improve the performance of the unconscious in extremely specific contexts – a Nascar driver will have better driving reflexes – there has been little research into the malleability of the overarching Type 1 system. If these unconscious/implicit learning skills turn out to be teachable, then we suddenly have an entirely new way to educating the brain and improving cognitive performance.

I make the assertion in Trading from Your Gut that, in fact, Type 1 learning skills can be taught and that one is foolish to ignore this possibility.

I also believe that the Type 1 system is much more malleable than people believe. One of the ways that I find most effective to teach the Type 1 system is to expose yourself to new experience, to keep on learning difficult concepts, to expose yourself to new cultures, new ideas, other ways of looking at the world. In this way, I believe that traveling someplace that is very different from where you living, living abroad, and learning a foreign language all help develop a more responsive and flexible Type 1 intelligence.

It will be interesting to follow the research in this area.

An old friend and colleague who I worked with for a bit at a startup in the height of the internet craze has a blog and is also an author.

Today, he has written an interesting, truthful, and entertaining article about the process of writing a book. If you’ve ever considered writing a book, or have been thinking of doing so for years, give it a perusal.

- Curtis

P.S. I’m pretty sure I know the guy known as “The Doof” (described in an illustration of Rand’s choice of editor about half-way down the article). I was also one of the people who thought he needed firing.

Jonah Lehrer has another interesting blog post called Feelings of Knowing. In it, he discusses the interesting IBM Watson project which was the subject of an equally interesting New York Times article.

Jonah notes how Jeopardy players most often press the buzzer before they know the answer to the question. Expert Jeopardy players do this because they have a feeling they know the answer even though they can’t yet say what it is. Jonah discusses the similar experience we have when there is a word on the “tip of our tongue” but we can’t quite pin it down:

What’s interesting about this mental hiccup is that, even though the mind can’t remember the information, it’s convinced that it knows it. We have a vague feeling that, if we continue to search for the missing word, we’ll be able to find it. (This is a universal experience: The vast majority of languages, from Afrikaans to Hindi to Arabic, even rely on tongue metaphors to describe the tip-of-the-tongue moment.) But here’s the mystery: If we’ve forgotten a person’s name, then why are we so convinced that we remember it? What does it mean to know something without being able to access it?

This is where feelings of knowing prove essential. The feeling is a signal that we can find the answer, if only we keep on thinking about the question. And these feelings aren’t just relevant when we can’t remember someone’s name. Think, for instance, about the last time you raised your hand to speak in a group setting: Did you know exactly what you were going to say when you decided to open your mouth? Probably not. Instead, you had a funny hunch that you had something worthwhile to say, and so you began talking without knowing how the sentence would end. Likewise, those players on Jeopardy are able to ring the buzzer before they can actually articulate the answer. All they have is a feeling, and that feeling is enough.

These feelings of knowing illustrate the power of our emotions. The first thing to note is that these feelings are often extremely accurate. The Columbia University psychologist Janet Metcalfe, for instance, has demonstrated that when it comes to trivia questions, our feelings of knowing predict our actual knowledge. Think, for a moment, about how impressive this is: the metacognitive brain is able to almost instantly make an assessment about all the facts, errata and detritus stuffed into the cortex. The end result is an epistemic intuition, which tells us whether or not we should press the buzzer.

The second important feature of these feelings of knowing is their speed. As Thompson makes clear, it’s the speed of these inexplicable hunches that allow the human contestants to defeat Watson. Although our meaty computer only requires 12 watts of electricity – we are a damn efficient information processing device – we’re still able to react before the supercomputer, which requires a massive air-conditioner to cool itself down. In the human brain, these primal emotions have been bootstrapped to self-awareness, so that many of our feelings are short, speedy summaries of our own vast hard drive. They are what urge us to raise our hand, or keep on trying to remember a name, or press the buzzer.

Emotions and Feelings are one way that the right-brain communicates with our conscious mind in the left brain. Not all emotions are irrational and illogical. Some are just hints of the knowledge hidden in our right-brains that we haven’t yet brought up to our conscious left-brained mind.

Smart traders learn how to develop their intuition to use their whole mind in their trading and strategy development efforts.

SFO magazine recently published an article I wrote, Right and Left Brain – Putting It All Together, in their annual June Trading Psychology issue. You can find it free online here. They ended up using my article’s topic for the cover of the magazine.

They are also hosting a Web-based Seminar (or webinar) this coming Tuesday June 15th at 11:30 AM EST. You can find details and sign up here.

- Curtis

One of the main topics I cover in Trading from Your Gut is the different roles of what is known as “right-brain” and “left-brain” thinking.

From Trading from Your Gut:

The left brain is good at extracting abstract models from patterns and examples, and at establishing and choosing categories. The right brain is skilled at determining whether a given example fits the model that defines a category and is good at recognition. The left brain analyzes and the right brain notices.

The best traders I know use both parts of their mind. They are both analytical and intuitive.

Each cognitive ability is particularly suited to certain tasks. The master trader makes sure to develop both his analytical skills and his intuition. This way they will be able to use each set of capabilities as appropriate.

For example, the best best system traders have a sense for the underlying assumptions for their trading systems. These are assumptions that are understood at the conscious level by the left-brain. When the market acts in such a way as to call into doubt the assumptions of the trading systems, the right-brain’s intuition might notice this. The left-brain, already primed and aware of the potential for periods when the assumptions required for the system to work may not hold, pays attention to the new information provided by the right-brain’s noticing and causes the trader to at least temporarily suspend trading for the system.

Some people are more open to this idea than others. Some traders are more willing to go with their gut instinct and act with discretion. This depends on their personality. In fact, trader’s are attracted to either discretionary trading or systems trading according to their personality type.

Right-brain decision makers are much more comfortable making decisions when they don’t have an explicit reason that they can pinpoint. Since the right-brain’s reasoning comes to our consciousness as fully formed ideas without any explicit rationale behind them, pure left-brained thinkers can have difficulty responding to these ideas. They tend to discount them as “unscientific” or “whims.”

From my experience, traders that test as “F” or Feeling types on a Myers-Briggs test are drawn to discretionary trading more than systems trading. Traders that test as “T” or Thinking types on a Myers-Briggs test are drawn to systems trading or to discretionary trading that is mostly rules based where only a relatively small portion of the strategy is left to discretion.

Most people fall somewhere along the continuum between the two poles. This affects their leanings with respect to the type of trading they are drawn to.

Nevertheless, all traders can benefit from developing both the hemispheres of their brain in their trading. It doesn’t make sense to discard the input from the best pattern-matching computer known to man, our right brain. At the same time, a right-brain without discipline and intellectual rigor can get you into trouble. Master traders use both hemispheres.

]]> http://www.curtisfaith.com/2010/04/09/left-brain-and-right-brain-trading/feed/ 6 http://www.curtisfaith.com/2010/04/09/left-brain-and-right-brain-trading/ http://feedproxy.google.com/~r/curtisfaith/~3/3dVYNCmeTq0/ http://www.curtisfaith.com/2010/02/13/traders-expo-reminder/#comments Sat, 13 Feb 2010 05:43:51 +0000 Curtis Faith http://www.curtisfaith.com/?p=297

Another reminder for those who will be attending the Trader’s Expo in New York this year, I will be giving a free workshop there this coming Monday February 15th from 1:30 to 2:30 PM.

If any readers drop by to see my workshop, please stop by the podium before or after to say hello.