While reading up on Farnamstreet, came across one good article on thinking.
https://www.farnamstreetblog.com/2013/07/five-elements-of-effective-thinking/
Reflecting on it, think it applies in life as well as trading. So let’s apply the learning to what we do as traders. Among the questions asked are :
Have you defined the problem? As traders, we want to succeed. Have more of winning trades. We want big winners. We know that losses must be cut short. The reality however is much different. Inspite of knowing what to do, we end up doing thing differently. So how can we change? Even if we are a winning trader, what must we do to increase our wins? How can we trade better? All the reading in the world will not help or will be of little help, if we have not defined the problem. So the first step to change things is to look at our trades. And find a common problem linking losses. Especially the big ones. As human beings, we are blind to our own shortcomings that would otherwise be easily apparent to someone else. The only way to move forward be it life or trading is to first define the problem.
Do you know what success looks like? O.k, it seems easy. But writing down our thoughts is an important step in the process of self discovery. Taking time to slow down, reflect and write down in concise and crisp sentences what out come we desire will help to throw light on other questions, that we may miss otherwise. For trading, that will require to know what constitutes a model trade, what mindset would be required to action it. What would tell us if the trade is wrong i.e How can we exit trades that look like model trades, but actually are a trap and so on.
Are you taking steps to reduce cognitive biases? The great American Philosopher William James made an apt observation of human nature. It goes : A great many people think they are thinking when they are merely rearranging their prejudices. (If there is any proof required, just reading the recent ‘discussions on Amir Khan’ in the thread – Day Traders Lounge, will remove any doubt. While I was upholding the principal of free speech, the majority of members took an emotional or jingoistic stand, disregarding the principal element of what it means to be a human) Will not digress on the subject, but we all tend to have blindspots in our thinking, Pavlovian response to stimuli on other. This leads us to making decisions, taking a view and acting in an irrational manner, as deep seated cognitive triggers compel us to act in a certain manner, and over-ride a rationale response. Without being aware of such blindspots and Pavlovian response, even if we spend a life time or more, we will continue to lose or stagnate inspite of best of our efforts.
Are you using mental models and connecting big ideas from multiple disciplines? What is a mental model? Mental model is nothing but a framework of our understanding of the world. It helps us to act without having the brain or the mind to think thru the same sequence of stimuli. So in effect, it saves the brain the effort of processing information when previous cognition of the same exist. Now the thing about mental model may or may not match the reality of life. And were reality of the world or the outcomes are different from what we desire or want, we need to revisit our mental models.
Regards to connecting the same to multiple discipline, it is self evident. A good marathon runner will not only have a technique to run, but will have a strategy to pace himself so as not to burn out early, or to stay abreast or outwit a particular competitor, etc. A good trader, will also have to draw from multiple disciplines besides strategy and technique, e.g risk management, trailing profits, handling volatility, gauging market sentiments and turns etc.
Coming back to Mental models, Charlie Munger, Associate of Warren Buffet and vice chairman of Berkshire Hathaway, uses them to decide on investment decisions. It is an interesting topic and will post on the same separately. But here’s Charlie Munger explaining mental models and its importance (Edited for brevity) :
https://www.farnamstreetblog.com/mental-models/
Well, the first rule is that you can’t really know anything if you just remember isolated facts. If the facts don’t hang together on a framework of theory, you don’t have them in a usable form. You’ve got to have models in your head. You may have noticed students who just try to remember and pound back what is remembered. Well, they fail in school and in life. You’ve got to hang experience on a framework of models.
The first rule is that you’ve got to have multiple models because if you just have one or two that you’re using, the nature of human psychology is such that you’ll twist the reality so that it fits your models … (and not the other way around) It’s like the old saying, “To the man with only a hammer, every problem looks like a nail.” But that’s a perfectly disastrous way to think and a perfectly disastrous way to operate in the world. So you’ve got to have multiple models.
And the models have to come from multiple disciplines because all the wisdom of the world is not to be found in one little academic department. It isn’t that tough because 80 or 90 important models will carry about 90% of the load in making you a worldly wise person. And, of those, only a mere handful really applies to most situations.
Five Elements of Effective Thinking :
1. Understand deeply
2. Make mistakes
3. Raise questions
4. Follow the flow of ideas
5. Change
Understand Deeply Don’t face complex issues head-on; first understand simple ideas deeply. Clear the clutter and expose what is really important. Be brutally honest about what you know and don’t know. Then see what’s missing, identify the gaps, and fill them in. Let go of bias, prejudice, and preconceived notions. There are degrees to understanding (it’s not just a yes-or-no proposition) and you can always heighten yours. Rock-solid understanding is the foundation for success.
Make Mistakes Fail to succeed. Intentionally get it wrong to inevitably get it even more right. Mistakes are great teachers — they highlight unforeseen opportunities and holes in your understanding. They also show you which way to turn next, and they ignite your imagination.
Raise Questions Constantly create questions to clarify and extend your understanding. What’s the real question? Working on the wrong questions can waste a lifetime. Ideas are in the air — the right questions will bring them out and help you see connections that otherwise would have been invisible.
Follow the Flow of Ideas Look back to see where ideas came from and then look ahead to discover where those ideas may lead. A new idea is a beginning, not an end. Ideas are rare— milk them. Following the consequences of small ideas can result in big payoffs.
Change The unchanging element is change— by mastering the first four elements, you can change the way you think and learn. You can always improve, grow, and extract more out of your education, yourself, and the way you live your life. Change is the universal constant that allows you to get the most out of living and learning.
