Thursday, March 12, 2015

Gut Instinct

The wise are instructed by reason, average minds by experience, the stupid by necessity and the brute by instinct.
Marcus Tullius Cicero

Nobel laureate Herbert A. Simon, a professor of psychology and computer science at Carnegie Mellon University who has studied human decision making for decades, thinks that we are able to develop a "gut instinct" because experience enables us to "chunk" information so that we can store and retrieve it easily. Our brains then "cross-index" this stored information, automatically finding patterns in one area that correspond to patterns in another. 


When you look at a chart, in 10 seconds or less your brain will tell you - Yes this is worth a further look, or just hit the button and NEXT. In other words, your gut instinct tells you more than you can logically know, because it represents much, much more information than you could ever logically process.


That being said, most traders will admit that sometimes their gut instincts have been wrong. That is nothing more than the nature of the beast we love. You are going to be wrong, don't let it bother you it's a part of this business. What your instinct is telling you is simply that you have come upon a "high probability trade", not a guaranteed one. A good gut instinct in trading is developed through experience as it is in any other profession. The more experience you have the more information your mind retains, the better your gut instinct becomes.


Be careful though, not to misinterpret your experiences. We all have that capacity. If you misinterpret your experience and allow that misinterpretation to become part of your subconscious programming you will defeat yourself. Also be careful on your perspective about what has happened. If you ask four traders to interpret what just happened you are very likely to get four different interpretations.


So how do you educate your gut instinct? How do you develop a powerful intuition that is much, much better than that of the average trader? Trust more in your experience than the experience of others. Remember, the experience of others may be distorted by misperception or miscommunication. Your experience, if you are lucid, is genuine. 

Trusting in your experience doesn't mean trusting the conclusions you draw. Challenge your conclusions and interpretations by talking to others. After an important incident, one that might have suggested a lesson to you, have a conversation with other traders you know. How did they see what happened? What lessons did they draw?

Ask yourself:
  • What went right?
  • What went wrong?
  • How could it have been better?
  • How could it have been worse?

Again, ask your colleagues for their opinions. Do they agree with your views on what went right and wrong? If not why not? The conclusions you draw from your actual experiences are the most valuable resources you have. They are collectively the foundation of your future decisions, the bedrock on which your future success will be built. Make sure those conclusions are valid and your instinct for making the right decisions, in any situation, will inevitably get better. If you do this in earnest, I promise you an improvement in your trading, more and more as time goes on.
PrudentTrader Archives 2004

2 comments:

Clark Langford said...

Professor Simon is right as rain. Instinct and experience are basically synonyms and work on charts and the markets. Also, they work in poker where people are actually trying to deceive you. It takes time in the saddle to gain the "feeling" in any of many endeavors.

Bill Zimmer said...

Clark, thanks for the comment -- appreciated!