Enhancing Trader Performance with Daniel Kahneman

*****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.***** — Editor’s Note

Traders who study disciplines outside of technical analysis have a distinct advantage over those who do not. Knowing why we think better helps us when we think about our trading process. It also better helps us accept any number of possible outcomes based on those decisions. Daniel Kahneman, the man behind the recent bestseller Thinking Fast and Slow, has been researching and writing about the thinking process for decades. It would be wise for us to appreciate and apply his studies to our decision-making processes both in and outside the charts. The following provides a few good places to start, as Kahneman’s contributions are too numerous to list here.

“When people face an uncertain situation, they don’t carefully evaluate the information or look up relevant statistics.” (The New Yorker)

“The main problem was that we failed to allow for what Donald Rumsfeld famously called ‘unknown unknowns.’” (McKinsey & Company)

“We use fast, intuitive thinking—System 1 thinking—whenever possible, and switch over to more deliberate and effortful System 2 thinking only when we truly recognize that the problem at hand isn’t an easy one.” (Bloomberg)

“People underweight outcomes that are merely probable in comparison with outcomes that are obtained with certainty.” (Kahneman’s Landmark Paper on Prospect Theory)

“How do people assess the probability of an uncertain event or the value of an uncertain quantity?” (Kahneman and Tversky on Judgment Under Uncertainty)

“Risky choices, such as whether or not to take an umbrella and whether or not to go to war, are made without advance knowledge of their consequences.” (Missouri Education)

“I was not the rational, sensible investor that I’d always thought I was.” (CNN Money)

“That your mobile phone allows you to trade options between innings is not relevant despite the advertising you may see on television.” (25iq)

“Kahneman’s research has shown that since we use overconfident, highly emotional logic in making investment decisions, the best approach is often the simplest.” (Bloomberg)

“The story was always the same: our ability to predict performance at the school was negligible. Our forecasts were not much better than blind guesses.” (Nepistemology)

“According to Kahneman, the investing industry has been built on an ‘illusion of skill,’ or the belief that one person has better information than the other person.” (Investing Caffeine)

David Blair


Related blog posts:
The Eight Principles of Elite Traders
Enhancing Performance with Bias Awareness

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