*****David Blair, The Crosshairs Trader, is a blogger/trader/educator who does a wonderful job of sharing research on elite performance and how it relates to trading. Below is his latest post for the SMB Trading Community. We hope you enjoy!***** — Editor’s Note
Let’s face it, when it comes to managing risk in an environment of uncertainty (e.g., the stock market) we can all benefit by learning from the experiences of others. It was the famous mathematician and physicist Sir Isaac Newton who said “if I have seen further it is by standing on the shoulders of giants.” Newton was not referring to his physical stature here but to his deep appreciation for those who helped him see the world more clearly. Is it not the same for those who navigate the uncertainty of the markets? Our quest to understand and interpret market structure is certainly enhanced from the technical studies of those who came before us. But more importantly, our trading can be enhanced with a deeper appreciation of how we make decisions and the factors that play important roles in our decision making. Michael Mauboussin, managing director and head of global finance strategies at Credit Suisse, has provided a wealth of informative studies on how to make better decisions, specifically where luck is a major factor, such as we find when trading. Let’s stand on the shoulders of Mr. Mauboussin and learn something, shall we?
“I like to think of markets as complex adaptive systems.” (an interview via Seeking Alpha)
“What if I told you that in many cases improving skill leads to results that rely more on luck? That’s right. Greater skill doesn’t decrease the dependence on luck, it increases it. If you have an interest in sports, business, or investing, this lesson is for you.” (The Paradox of Skill)
“Outcomes from many activities—including sports, business, and investing—are the combination of skill and luck. Most people recognize that skill and luck play a role in results, yet they have a poor sense of the relative contribution of each. The ability to properly untangle skill and luck leads to much better thinking about most day-to-day outcomes, and allows for sharply improved decision making.” (Untangling Skill and Luck)
“The combination of differential capabilities and existence of superior performers provides a basis for judging skill versus luck. Individuals who consistently succeed in various probabilistic fields possess both superior skills and a dissimilar approach to others. In fact, these super performers appear to have more in common with one another than they do with the average participant in their own field. A great investor thinks more like a great handicapper than the average investor.” (Decision-Making For Investors)
“Chances are you’re unaware of the limits to your abilities, unappreciative of the challenges that lie ahead, and uninformed of all that can go wrong.” (Smart People, Dumb Decisions)
An explanation of how split-brain experiments help us understand why we have a hard time understanding randomness and luck. (VIDEO: Why We Don’t Understand Luck)
Books for further enhancement:
The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing
More Than You Know: Finding Financial Wisdom in Unconventional Places
Think Twice: Harnessing the Power of Counterintuition
THE CROSSHAIRS TRADER
Related blog posts:
The Eight Principles of Elite Traders
Enhancing Performance With Bias Awareness
No relevant positions
I find many of these theories on markets and behaviour (including Taleb on Black Swans, Soros on Reflexivity) are saying basically that there are things about the future we don’t know and can’t know, because the outcome depends on the interactions of everything happening now, some/much of which is unknown. The butterfly effect would be an example.
In Mauboussin’s reference to the skill and luck jars, the luck one contains most unknown variables. Maybe though what is happening as skill improves is less down to a dependence on “good luck”, as an increased ability for avoiding “bad luck”?
Golfer Gary Player apparently said “It’s funny how the more I practice the luckier I get”. I took this initially to be sarcasm, but perhaps there was more to it.
Thanks for a thought provoking article.