Trading Psychology : On the Role of Intuition and Reflection on Trader Performance

Trading is often about how to take the appropriate risk without exposing yourself to very human flaws.
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Tue Sep 05, 2017 12:42 pm

An article in the dutch financial times led me to hunt for this article:

From the conclusions: 'Our work shows that cognitive reflection and theory of mind skills are the main drivers of
trader performance. Commonly-studied variables such as financial literacy, personality traits and
risk attitudes play a lesser role in understanding trader performance. Our findings echo recent
research in cognitive psychology stressing the limitations of current cognitive tests (e.g. Raven)
to assess rational thinking, which is defined as one’s capacity to avoid behavioral biases and thus
apply Bayes’ rule correctly. The author advocates the development of a
rationality quotient (RQ) that would complement the commonly-measured IQ.
To date, the best measure of RQ is provided by the CRT.
Our finding regarding the predominant role of RQ as opposed to IQ (Raven test) in explaining
trader performance is consistent with the well-known observation of Warren Buffet :
“You don’t need a rocket scientist. Investing is not a game where the 160 IQ guy beats the
guy with the 130 IQ... Rationality is essential...” '

Stated a bit differently, to identify a good trader you need to look at whether he correctly uses bayes' rule in his daily life.
(The article is rather long, but don't despair, two-thirds is references and appendix and from what remains you can skip another 50% which explains the statistical tests that were used)

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Tue Sep 05, 2017 2:10 pm

I'm sure I read something like this before, maybe not the same not sure but it had similar conclusions.

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