I liked this post by Morgan Housel:
How People Think (29 min read)
This article describes 17 of what I think are the most common and influential aspects of how people think.
It’s a long post, but each point can be read individually. Skip the ones you don’t agree with and reread the ones you do – that itself is a common way people think.
My obsessive need to consolidate and refactor required transposing his list to this one (I re-titled them all for compression):
2) We only see the tip of icebergs
3) All probability gets represented as yes or no
4 and 5) We expect trees to grow to the sky (which leads us to overreaction)
6) We are surprised when geniuses disappoint us
7) Unhealthy competition makes us short-sighted. The antidote is extending the horizon to create space.
8) Stories FTW
9) Complexity sells
10) Motivated reasoning is the rule
11) Experience is the raw material for empathy
12) Heisenberg makes us poor self-evaluators. Seek other’s input
13 and 16) Innumerate about extremes [compounding & inevitably of rare occurrences ie the birthday problem]
14) Simple but not easy
15) When imagining change we fail to consider the full context [for example when you are younger you imagine being older as your current life with grey hair but you don’t consider the mental and emotional evolution that comes with aging]
17) Idealism is seductive but counterproductive often leading to isolated demands for rigor
I want to zoom in on #7. It’s our child-eating friend Moloch again. I covered him several times this year:
- Notes From Moloch (9 min read)
- Don’t Look Up, It’s Moloch (10 min read)
- Putting Moloch To Rest (7 min read)
Recall how Moloch symbolizes the tendency to overoptimize on a single value to the detriment of all others, swallowing everyone in its unhealthy path.
I tend to be pretty laid back in general. For better or worse, I tend to be a satisficer rather than a maximizer. A charitable interpretation of that trait (there are non-charitable ones too but I’m the host of this here party at the Moontower) is I appreciate ergodicity. See Luca Dellanna’s What Is Ergodicity? for a quick explanation that word.
But it turns out, humans likely grok the idea in their DNA. In fact, this appreciation forms the basis of pushback against some of the cognitive bias research, especially loss aversion. Contrived behavioral economics experiments assume agents maximize single-trial expected value instead of median expectancy. What behavioral economists label as design flaws are more of Chesterton’s Fence to protect you from self-destruction in the name of maximization. The expected value of saved seconds from jayrunning across the street might be positive. But you only need one ill-timed fall to negate the sum of those optimized moments.
So when I say that “slack” is the answer to Moloch, it has nothing to do with being lazy. It’s appreciating that any one trial is just a single draw in a repeated strategy and the merits of the strategy cannot be graded on isolated outcomes.
Since we are on the topic of behavioral economics, there is another common knock against cognitive bias research.
Shane points out a paradox in cognitive science. Knowing our biases doesn’t seem to help us overcome them.
It is definitely true that it is sort of descriptive of the past. A lot of these heuristics and biases are things that we can see when we after we’ve already identified that a mistake has been made. And we say, Okay, well, why was the mistake made? Say, oh, because I was anchored, or because of the way the question was framed, or whatever it might be, we have a really hard time seeing it in ourselves.
But we know the cure for this. I wrote:
This is a topic the brilliant Ced Chin has studied in depth. Ced told me that the literature suggests the only way cognitive bias inoculation works is via group reinforcement. I told him that was exactly the cultural DNA when I was at SIG which makes me believe there is a lot of value in being aware of bias. Anytime you replayed your decision process, it was a cultural norm to point out where in the process you were prone to bias.
Todd reinforces Ced’s conclusions:
We have a really easy time seeing when someone else is making that type of stupid mistake. A big part of our approach to education is to teach people to talk through their decisions, and to end to talk about why they’re doing what they’re doing with their peers, the other people on their team. If we can do that real-time, that’s great. Often in trading, you don’t have that opportunity, because things are just too immediate. But certainly, anytime things have changed. If you’re doing things differently, it’s a really good time to turn to the traders around you. And the quantitative researchers around you and the assistant traders and your team and say, Hmm, it looks like all the sudden Gamestop is a whole lot more volatile than it was a week ago. Here’s how I’m positioning for this trading. What do you guys think? And have someone say, oh, it seems like you’re really anchored to last week’s volatility. If things have changed that much, you need to move much more quickly than you’re moving right now.So you don’t realize that you’re anchored, that’s the whole nature of being anchored, is that you don’t recognize the outsized importance that the anchor has on your decision, but somebody else who’s a little bit more distant from it can. So if we’re good at encouraging communication, then we’re going to be really good at getting other people to help improve your decision process.
There it is. The key — communication. It’s not some magic formula. Even after I left SIG I spent my whole career working with SIG alum. This culture and these types of communications happen all day on the desk. Despite the common perceptions of “trading”, I have always found it to be a team game and communication skills are paramount.
I know that you are fond of pointing out that you are the sum of the five people that you spend the most time with. So if the people that you’re spending the most time with are your co-workers who are thinking about trading the same way you are, then maybe you’re going to combine the same types of errors, it’s certainly better than then trying to act on your own. But even better is if you have a culture that rewards truth-finding, as opposed to rewarding action. If nobody feels personally attacked, because of somebody else pointing out their error, but instead feels like we together have now done more to get closer to, to some truth to the better way to act or the you know, the more accurate, fair value of this asset that we’re trading, then everybody feels like it’s a win. And they will therefore encourage the involvement of the people around them.
If you work in a Molochian, credit-stealing environment you face a prisoner’s dilemma as to whether you even want to even correct others’ biases. (I suspect this gets worse as the fiefdoms that emerge in large hierarchies rot the spirit from the inside). Teamwork and its antecedent, alignment, are devilishly hard, but critical because they hold the key to improving decisions.
When Shane asks what the most important variables are for being a better decision-maker, he expects Todd might say “probabilistic thinking”. But Todd did not hesitate with his answer:
Talk more is number one, that beats probabilistic thinking. That beats sort of anything else. Truth-finding is being able to bring in other people in the decision process in a constructive way. So finding good ways to communicate, to improve the input from others. Thinking probabilistically I think is definitely a very, very important piece of trying to diagnose what works by trying to think of where where things fall apart, where people fail. The other place that people fail is falling in love with their decision process and not being open to being wrong. So an openness to feedback to finding disconfirming information to actively seeking out disconfirming information, which is really uncomfortable. But that I think is the other piece that is super important for being a good trader.
If I were to try to be a prop trader from my pajamas, I’d form a Discord channel of sharp, open-minded, truth-seeking, humble, teachable teammates before I even opened a brokerage account.
Trading is not a single-player game.
You need honest mirrors. Not the ones you find in fancy dressing rooms.
Stay groovy squad