Trading Decisions: Stacking The Odds In Your Favor

As an Executive Coach/Trading Performance Coach probably the most common types of questions I get asked fall under the category of ‘How can I make better decisions?’ Examples include: How can I make sure I run my profits? How can I ensure I exit and enter trades at optimal times? How can I ensure I have sufficient risk on when I am on the right trade? How can back my ideas more effectively? How can I ensure I promote the right people to the right positions in my team? How can I effect change in my business unit without alienating members of my team? Etc. I am sure you get the point. – However this goes further, another type of question I often get asked is ‘How can I raise my level of self-confidence or self-belief?’, this may not directly be about making the right decisions, but indirectly it is a huge factor: As we make more correct decisions, our levels of self-efficacy (self-confidence and self-belief married to ability) will rise.

One of the first places to start is to look is to understand how and why we make ‘bad decisions’. An excellent article has come across my desk today from the New York Times which discusses just that. The article, by Noreena Hertz, is called ‘Why We Make Bad Decisions’. Hertz makes some excellent points, many of which I have discussed before in various articles. – However I felt it might be useful to highlight some of the key points of Hertz’s article: Note, the article refers to the medical professions, hence some of the following excerpts make references to that.

‘If we are to control our own destinies, we have to switch our brains back on and come to our medical consultations with plenty of research done, able to use the relevant jargon. If we can’t do this ourselves we need to identify someone in our social or family network who can do so on our behalf.’ –

This is a vital point in trading. I does not matter how bright or intelligent one is, we are all prone to switching-off either consciously or non-consciously. – As Daniel Kahneman says ‘We're blind to our blindness. We have very little idea of how little we know. We're not designed to’. In fact it is possible that the more qualified and knowledgeable a person is, the more they may be prone to falling victim to this point, this is re-emphasised later in the Hertz’s article when she says ‘I’d learned in my research that the super-confident, doctor-as-god types did not always perform well’. A combination of excessive Ego and Over-confidence can lead to poor decisions, however this can be exasperated when other people are placing their trust in these experts and thus effectively switching their own brains off (applies to watching CNBC or reading analyst research). I don’t think it is any surprise, that many of the best traders I have worked with and coached are some of the most humble and grounded people you would ever wish to meet, which ironically runs contra to the traditional depiction of traders as ‘Ego-maniacal Masters of the Universe’.

A further interesting excerpt from the article applicable to trading situations: ‘Anxiety, stress and fear — emotions that are part and parcel of serious illness — can distort our choices. Stress makes us prone to tunnel vision, less likely to take in the information we need. Anxiety makes us more risk-averse than we would be regularly and more deferential.’ – Anxiety, Stress and Fear, few traders will fail to identify this deadly combination as often present when trading, fear more anything has the ability to affect your decision-making, I often notice that traders who are really struggling to move forward have ‘fear’ present to a large degree and at regular times.

– This takes many forms, fear of losing money, fear of being wrong, fear of regret, fear of missing out, fear of looking (or feeling) stupid, etc. In these situation, fear is in control of your trading, whereas successful traders need to be in control of their trading, whilst recognising when fear is present, and consciously dealing with it. Hertz addresses this point in the article when she writes; ‘We need to know how we are feeling. Mindfully acknowledging our feelings serves as an “emotional thermostat” that recalibrates our decision making. It’s not that we can’t be anxious, it’s that we need to acknowledge to ourselves that we are.’

Hertz takes this a step-further and echoes Kahneman’s point about us being ‘Blind to our Blindness’ when she writes ‘it is also crucial to ask probing questions not only of the experts but of ourselves. This is because we bring into our decision-making process flaws and errors of our own. All of us show bias when it comes to what information we take in. We typically focus on anything that agrees with the outcome we want.’………….’We need to acknowledge our tendency to incorrectly process challenging news and actively push ourselves to hear the bad as well as the good.’ ………..’When we find data that supports our hopes we appear to get a dopamine rush similar to the one we get if we eat chocolate, have sex or fall in love. But it’s often information that challenges our existing opinions or wishful desires that yields the greatest insights.’ In the final part of the above excerpts Hertz is describing what is termed by the behavioural sciences as ‘Confirmation Bias’. This is extremely common in trading and can have an extremely harmful effect on people’s ability to remain objective and subsequently generate positive returns.

Finally the article concludes with the following piece of wisdom: ‘With brain switched on and eyes wide open, we can’t always guarantee a positive outcome when it comes to a medical decision, but we can at least stack the odds in our favour.’ As we know, trading is about winning in an environment where uncertainty is part of life. One of the paradoxes of trading success is that winning traders can often get things wrong and lose money, yet still end up being successful, whilst losing traders can often get the market right, have many successes, yet still end up losing money.