Trading Psychology : Overcoming cognitive biases

Trading is often about how to take the appropriate risk without exposing yourself to very human flaws.
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arbitrage16
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Mon Feb 19, 2018 9:07 pm

I understand that part of the issue with CB is that they are so ingrained and hard to work around, but I see them as being pretty confounding to trading success, so wondering how people have found ways to get around them having too big an influence on trading. A few examples...

Anchoring bias - tendency to anchor onto the first bit of information you receive.

Recency bias - tendency to overvalue the most recent piece of information because that info is fresh and salient

Loss aversion bias - tendency to dislike losing a lot more than enjoying winning, can lead to inaction.

Bandwagon bias - tendency to want to be a part of the crowd, to do things because others are doing them or believing them

Confirmation bias - tendency to stick with information that confirms out point of view and dismissing info that goes against it

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Euler
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Mon Feb 19, 2018 10:17 pm

I think some of it comes down to changing as a person, that's my experience anyhow.

I'm a different person from the one I knew before learning to trade. I can spot somebody that is going to struggle to trade from the way they project themselves. You often need to think and act in a way that just isn't 'normal' as the cognitive biases are there for social reasons and difficult to overcome.

Derek27
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Mon Feb 19, 2018 11:02 pm

arbitrage16 wrote:
Mon Feb 19, 2018 9:07 pm
I understand that part of the issue with CB is that they are so ingrained and hard to work around, but I see them as being pretty confounding to trading success, so wondering how people have found ways to get around them having too big an influence on trading. A few examples...

Anchoring bias - tendency to anchor onto the first bit of information you receive.

Recency bias - tendency to overvalue the most recent piece of information because that info is fresh and salient

Loss aversion bias - tendency to dislike losing a lot more than enjoying winning, can lead to inaction.

Bandwagon bias - tendency to want to be a part of the crowd, to do things because others are doing them or believing them

Confirmation bias - tendency to stick with information that confirms out point of view and dismissing info that goes against it
Bandwagon bias is understandable if you're at a party and you're the only one who's not interested in football, but when it comes to trading you have to understand from the outset, that if you do what everybody else does, either you don't win or everybody wins, which isn't possible.

Loss aversion bias is another trading no-no that leads to disaster.

The other biases you mention are probably harder to eliminate but I think are less critical to trading, or at least won't lead to disaster.

I remember an experiment where a group of people were shown a video of a job interview. The 50% that saw the interviewee slip-up at the beginning but sound more confident at the end, were more positive about his presentation the the other half who saw the edited version where he was confident at the beginning but slipped up at the end, suggesting most people have recency bias.

Personally though, I think it is easier to eliminate such biases when focusing on something specific such as trading, as it is to do in day-to-day life when you're out socialising.

arbitrage16
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Tue Feb 20, 2018 9:58 am

Euler wrote:
Mon Feb 19, 2018 10:17 pm
I think some of it comes down to changing as a person, that's my experience anyhow.

I'm a different person from the one I knew before learning to trade. I can spot somebody that is going to struggle to trade from the way they project themselves. You often need to think and act in a way that just isn't 'normal' as the cognitive biases are there for social reasons and difficult to overcome.
That's a useful pointer, thanks. I am big on personal development and an avid reader, so if there are any books or articles, or even exercises you'd recommend on overcoming this, I'd appreciate it.

Thus far the most useful I have found have been Thinking Fast and Slow and The Chimp Paradox.

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Euler
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Tue Feb 20, 2018 11:08 am

Reading fast and slow made me realise I was on the right track and I wasn't going mad and that in fact everybody else was.

arbitrage16
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Wed Feb 21, 2018 11:27 am

Euler wrote:
Tue Feb 20, 2018 11:08 am
Reading fast and slow made me realise I was on the right track and I wasn't going mad and that in fact everybody else was.
Ok, and how is that anecdote useful? Or indeed even a response to my request?

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marksmeets302
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Wed Feb 21, 2018 12:20 pm

Show a little respect. Euler has given more useful advice here than anybody else.

Oh now I see... you think he was reading on a fast and a slow pace :lol:

3virgul14
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Tue Mar 06, 2018 11:03 pm

He meant this, and maybe you should read the articles of Brett Steenbarger..

http://traderfeed.blogspot.co.uk/2017/1 ... -2014.html
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ruthlessimon
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Tue Mar 06, 2018 11:53 pm

Image

Image

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ruthlessimon
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Tue Mar 06, 2018 11:57 pm

A little shame the small print doesn't quite come through, although I believe each can be pumped straight into google & has a lot of material on each bias.

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