More Thick and Tasty stuff...

Found links to this post at Dr. Brett's:
This is a great post...

Wednesday, October 25, 2006
Inside The Trader's Brain: Decision-Making and Emotional Arousal
For years, behavioral finance researchers have been aware that people's decision making is greatly affected by how choices are framed. For instance, the same monetary bet framed as a choice between a certain vs. risky gain and a certain vs. risky loss elicits very different choices. (We tend to take certain gains, but will seek risky losses to avoid certain loss). Studies using functional magnetic resonance imaging (fMRI) find that we expend less cognitive effort in taking a sure gain than in choosing risky gains, sure losses, or risky losses. It may well be that traders don't let their profits run simply because they take the easy way out cognitively. Conversely, traders may be reluctant to set and follow stops because of the greater cognitive effort required.

It turns out, however, that this taking the easy way out and avoiding difficult decisions may not be a function of laziness. A very interesting investigation coming out of the Institute of Neurology at University College London finds that the framing effect on decision making is mediated by an emotional center within the brain: the amygdala. This is the same brain center that cognitive neuroscientist Joseph LeDoux has linked to our response to stress and trauma.

The implications are significant. When blood flow is directed away from the brain's executive center, the frontal cortex, and the amygdala and associated emotional centers are activated, we are likely to underutilize those executive functions--reasoning, judgment, planning--and respond to our (emotional) framing of choices with a lack of effort. Going with our feelings might just be the reason we don't think through our choices.

It is also likely that we frame our choices differently during periods of focus/concentration vs. emotional arousal. Stressful episodes in the market, activating the amygdala, are likely to elicit a framing that is different from the careful trade planning we conduct when we are cool and calm. Research, for instance, finds that fear and anger color our decision making about preparing for terrorism-related risks. Emotional factors have also been found to color decision making about economic choices.

This helps to explain why I have found biofeedback to be extraordinarily helpful for traders who experience emotional disruptions of decision making. By working with traders in stressful situations and having them control their level of arousal during these episodes, biofeedback enables them to retain access to their executive capabilities. In a very important sense, successful traders train their brains for accurate decision-making under stressful circumstances.

Sometimes, looking back on our trading decisions, we wonder if we were in our right minds. How accurate that concern turns out to be! Some of the best trading psychology interventions are the ones that keep us in our right minds as we make decisions under conditions of risk and uncertainty.


Also found this paragraph from his August 4, 2007 post:

...If you're going to trade, do it the right way. Don't traumatize yourself. Observe and research before you trade; practice trading small and in simulation mode before you put your capital at risk. Don't abandon your day job until you have a track record of consistent profits across various market conditions. Trade less, not more: emphasize the high probability trades and keep your capital safe in the interim. Forget about riches and don't put yourself in a position where you need to trade large and often to make a living; work on covering costs consistently and managing risk. If you don't see objective evidence of an improving learning curve after a year or two of consistent effort, consider the possibility that your talents lie elsewhere.

Trading may or may not produce gain, but it should not be a continual source of pain. No one has ever traumatized themselves to success.


And this from today's post:

Traders don't fail because they lack the right setups or because they weren't born with the right trading personality. Traders fail because they do not survive their learning curves: they put their capital at risk long before they have developed necessary skills and expertise. Simulation-based learning is a way to accelerate that curve and reduce the costs associated with the inevitable mistakes made by learners.

Dr. Brett's Blog- Thick and rich and tasty...

I continue to mine Dr. Brett's blog for wisdom and guidance. However, one doesn't have to mine when the treasure is laying on top for you to see. Such is the case with today's morning post. I won't recap or offer commentary, it stands on its own. From it, I am clicking on his recommended links at the bottom. I just finished the "Implicit Learning and Trading" link to his August 27th, 2008 essay entitled, "Implicit Learning and the Unattached Mind." It is outstanding. This ties quite nicely with Scott Farnham's blog post of August 3, 2009 ( http://www.fearandgreedtrader.blogspot.com/2009_08_03_archive.html ).

I'll be moving on to the other links after this post.

If you are not reading Dr. Brett, you are doing yourself a great disservice.

Saw it, liked it...

I saw a link to this Kirk Report essay ( http://www.thekirkreport.com/ ) at Dr Brett's blog ( http://www.traderfeed.blogspot.com/ ) and immediately thought of my recent hand-wringing over the inability to break my proclivity toward adding to losing trades to average a better entry price. This article is interesting... and no, I am not trying to rationalize my behavior! :-) But, it is food for thought...


Thursday, February 11, 2010
Consider The Consequences

I love the scene in the television show The Office when a woman standing in a long line asks Dwight Schrute to hold her place behind him because she has to go and use the restroom. "No!" he replied. "Did you grow up in a household without consequences?" After looking back at him with a mixture of both disbelief and disgust, Dwight then explained to her that he had taken enough time to go to the restroom BEFORE getting in to the long line and she should have done the same.
Those of us who follow the rules whether it be in life or trading, can sympathize with Dwight, especially when dealing with other people who don't follow the same rules you think are important and who impact you in some negative way.

I was thinking about that this morning after a few things happened this week that illustrate again that not only do most people break the rules (even the ones they set for themselves in trading) but that most don't spend a single moment thinking about and considering the potential consequences that could follow BEFORE those rules are broken. And, I think that's an important point.

The truth is that as traders and investors, we all set rules for ourselves to follow whether we are conscious of it or not. Most of us in fact do a pretty good job of following those rules and, of course there are rare times the rules must be broken. No rule will work perfectly in every type of environment which is why some of the best traders out there are those who learn to be flexible when the environment demands it. A combination of skill and experience will help you know when those rules are not working to your advantage.

But, in those traders who are flexible and successful, you'll often see something very different which is that they also make absolutely sure that when they do violate their own rules, that they've taken enough time and have properly considered all of the most probable consequences both good and bad that could follow before violating that rule. They don't simply say, I'm not going to follow my trading rule today and at the same time not fully understand the potential consequences that could follow from doing so. As many of you have already discovered, that's a terrific way to get into a lot of trouble.

I've learned over time that when I am contemplating breaking one of my own rules (like chasing a stock that doesn't fit my low/risk high/reward strategy for example) I also require myself as a matter of habit to stop, think, and quickly outline the probabilities of what could follow if I break or abandon my rule. In doing so, more often than not, by considering those consequences, I'm reminded why I set the rule in the first place and just simply follow the rule. In fact, it is often much easier that way. But, there are rare occasions, where after I go through and outline the consequences that when I consider everything, I think the rule should still be broken in that particular situation.

Learning when that is the case is an important element of being a successful trader. In fact, it is often in the rule breaking and subsequent tracking of the consequences that follow from it that you learn more about who you really are and how to become more successful in the market.
Posted by Kirk at 2:35 PM in Education Bookmark Feeds Link Email This