LITMIR.BIZ

      Kahneman, in an excellent research summary, identifies two basic modes of thinking. One is fast; the other is slow. In Thinking, Fast and Slow (2011), he explains that fast thinking enables us to respond to challenges in the immediate present. If a car suddenly drifts into our lane, we quickly swerve to avoid an accident. That rapid processing enables us to respond to crisis. If we had to think through every aspect of what was happening on the road, we'd hardly be able to adjust to the flow of traffic – or avoid oncoming vehicles!

      The problem with fast thinking is that it is surface thinking. We perceive something, rapidly assess its relevance to us, and quickly respond. In the case of the oncoming car, that's a good thing. In the case where we see an African American man walking toward us on the sidewalk and we quickly cross the street, that same rapid processing allows bias to drive our actions. Indeed, many of the well-known cognitive biases, such as recency bias and the availability heuristic, are the result of fast processing taking control of our decisions and actions.

      Slow thinking, on the other hand, is deep thinking. When we think in slow mode, we observe, catalog our observations, analyze what we've observed, and draw conclusions. Such a process is less likely to be swayed by superficial bias, but it consumes a great deal of our cognitive resources. We can drive the car and carry on a conversation while in fast mode. It's unlikely that we could solve a complex mental math problem while remaining fully attentive to road conditions. That's one reason texting and driving so often leads to disaster.

      For efficiency's sake, we tend to rely on the efficient fast system except in situations that call for deep reflection. As a result, many of our decisions and actions end up reflecting first impressions, not carefully reasoned conclusions. How many times do we analyze a market, plan a trade, and then do something different in the heat of market action? The problem is not a lack of discipline per se. Rather, our fast thinking brain has hijacked our slow, reasoning mind. Quite literally, Kahneman points out, a different part of the brain controls our fast and slow processing, sometimes taking control at the least opportune occasions.

      If we think of two brains – two relatively independent information processing systems – then it isn't a far reach to identify at least two intelligences. We can be smart fast thinkers, smart deep thinkers, sometimes neither, and sometimes both. Think of very talented salespeople or highly experienced air traffic controllers. As a rule, they are not the most intellectual people – not necessarily deep thinkers – but they process information very well, very quickly, and very flexibly. The salesperson reads customers very well and subtly adjusts his or her tone of voice and message to the immediate situation. The air traffic controller doesn't think about each plane, where it's going, who operates it, and so on, but instead quickly processes the many planes coming in and out of a busy airport. This ability to quickly process rapidly changing information enables the controller to make split-second decisions that keep the system functioning efficiently and relatively accident-free.

      Conversely, we've all known very bright, intellectual people who seem to lack practical sense. They can solve math problems and analyze situations, but then are clueless when it comes to reading the social cues of a dating situation. The engineer could tell you all about the construction and operation of a car engine, but it's the racecar driver who has the smarts to power the vehicle to victory at Indy.

      We often refer to trading as if it's a single activity. Trading, however, is like medicine: a broad set of activities and specialties. A psychiatrist is a physician; so is a surgeon, and so is a radiologist. The skills required for each are very different. So it is in financial markets. Market making is very different from global macro portfolio management – and both are quite different from the trading of options volatility.

      One of the things that make trading interesting is that it blends fast and slow thinking in myriad ways. At one extreme, we have the daytrader, who performs relatively little deep analysis, but who can excel at real-time pattern recognition. At the other extreme, we have the long-term equity investor who studies companies in depth and constructs complex portfolios that hedge various sources of factor risk in order to profit from the price movements of strong versus weak companies. In between these two are hedge fund managers that combine the deep dives of macroeconomic analysis with the quick processing of market trends and reversals.

      My experience is that successful market participants rarely excel in both slow and fast thinking, but they almost always excel in one or the other. If you look at what makes them successful, what you find is that they discover ways to engage markets that leverage either their fast processing or deep thinking skills. In a purely cognitive sense, they play to their strengths. This was certainly true of Maxwell: His scalp trades were the result of considerable fast thinking skill.

      Slumps follow when traders respond to market setbacks by switching cognitive modes. The fast thinker begins to overanalyze markets and loses further touch with markets. The deep thinker becomes fearful of loss and acts on short-term price movement. Anxiety and performance pressure take traders out of their cognitive zones – and away from their strengths. So it was for Maxwell. His setbacks began in low-volatility markets that were increasingly dominated by market-making algorithms. He convinced himself that he needed to adapt to these changes by widening his holding periods and trading more strategically than tactically. Instead of following the market tick by tick and gauging order flow, he looked to longer term support and resistance levels on charts and ideas coming from earnings reports, data releases, and recent news. All of these took Maxwell out of his zone: He was trying to adapt to change, but doing so by becoming less of who he was at his best. Fortunately, his scalp trades kept his fast thinking skills alive – and his trading account treading water – during this wrenching period of adjustment. Over time, however, his results were becoming more average because he was increasingly relying on his relatively average deeper, analytical skills.

       What turned Maxwell around psychologically, however, was that he redefined his emotional commitment to trading. Recall Chris and Gina. What was their prime motive? They wanted to be great parents and provide their children with the kind of upbringing they never had. They could not change their marriage until they reached the recognition that they couldn't be good parents to their maturing children unless they modeled a good marriage. Now their motives were aligned. They practically leaped into enhancing their marriage because they were doing it now for a good cause.

      Maxwell's psychological raison d'être was that he was the smart guy who profited from the idiocy of others. Making money for him was an emotional affirmation that he was clever, unique, and distinctive. When he stopped making money – and especially when he saw market makers profiting at his expense – he began feeling like an idiot. So what did he do? He tried to make himself into a deep thinker, someone who would be smarter than others in a different way. Ironically, he was seeking affirmation by running from his strengths.

      What the solution-focused exercise demonstrated was that Maxwell was successful in a number of his trades, but that he was successful by being more tactical, not by becoming a grand strategist. As with Gina and Chris, Maxwell embraced his strengths in spades once he realized that they were the path to his emotional success. A kid from the proverbial wrong side of the tracks, Maxwell had a bit of a chip on his shoulder. He was out to prove himself to be worthy. That emotional priority wasn't going to change. We just needed to align that priority with his best trading. That became much easier when Maxwell was able to see that, in trying to predict markets, he was being one of the idiots he routinely ridiculed. He was no more willing to be an idiot than Gina and Chris were willing to be bad parents.

      I won't pretend that the work with Maxwell was easy. The turnaround did not occur overnight. A great deal of work remained to distinguish why some of his tactical trading based on pattern recognition worked some of the

Скачать книгу