• Michael Mauboussin: Turtles in Omaha

The attributes of successful traders or investors are not limited to those realms. In fact, we argue that there is an approach that distances the best performers in all probabilistic fields from the average participant. The approach has three central elements:

1. A focus on process versus outcome.

2. A constant search for favorable odds, including a recognition of risk.

3. An understanding of the role of time.

• Jeff Mathews’ multi-part series: Pilgrimage to Omaha

“We knew during the Long Term Capital Management Crisis that there would be a lot of opportunities, so we just had to read and think eight to ten hours a day.”

“We have no system for estimating the correct value of all businesses. We put almost all in the ‘too hard’ pile and sift through a few easy ones.”

• Curtis Faith: On Digging Deeper

New traders tend to overgeneralize. They tend to find patterns that seem to work in the recent past and believe that these will work in the future. The solution is to dig deeper and do research. We now have available an enormous amount of market data which can be used to explore market phenomenon that we have not seen ourselves. There is no excuse for not doing your own research.

• Via Michael Covel, APA: A familiar opinion is the same as a popular opinion?

Whether people are making financial decisions in the stock market or worrying about terrorism, they are likely to be influenced by what others think . . . repeated exposure to one person’s viewpoint can have almost as much influence as exposure to shared opinions from multiple people . . . hearing an opinion multiple times increases the recipient’s sense of familiarity and in some cases gives a listener a false sense that an opinion is more widespread then it actually is.

• TraderPsychology: So How do Traders Break Their (Bad) Habits?

The process is long and hard. First, the addict must admit that he needs help. That he is powerless to change by himself. Usually, it means that the addict has hit a nadir or hit bottom. Only at such a time, when he is unable to lie to himself anymore, will he be motivated to seek change and be willing to put in the hard work that is required.

Via the TraderPsychology blog:

• Smart People Choke Under Pressure

. . . individuals with high working-memory capacity, which normally allows them to excel, crack under pressure and do worse on simple exams than when allowed to work with no constraints.

• Study Reveals the Logic Behind Our Irrational Brains

. . . the decisions people make are remarkably susceptible to how choices are presented or framed.

People most immune to this framing effect had increased activity in other brain regions, the orbital and medial prefrontal cortex, “some of the most modern areas of the brain, the most different between us and the other primates.

• Bad Decision-Makers Lack Reasoning Skills

Many people are affected by the way that information is framed, marketed or spun, as in advertisements, thereby exhibiting poor decision-making skills, . . . But people with strong reasoning skills make the same choices no matter how information is presented to them.

Very much relevant to investing & trading!

• Brett Steenbarger: Assessing Trader Personality: The Role of Trader Psychometrics

. . . personality traits - including overconfidence and sensation-seeking - are significantly associated with trading results. This corresponds to my own, more informal, findings that high degrees of neuroticism, coupled with sensation-seeking and low conscientiousness, are associated with poor trading outcomes.

Trader psychometrics can reveal important dimensions of trader personality:
1) Frequency of Trading
2) Size of Positions Relative to Portfolio Size
3) Average Size of Losing Trades vs. Winning Trades
4) Number of Different Positions and Strategies Employed

• TraderPsychology: Can we unlearn?

So if we can’t “unlearn” something, what can we do? Well, the process entails learning new behaviors and replacing our old, destructive habits with these new behaviors. Addictions persist because the associated memories and behaviors persist.

• James Montier: Prophet Among Pinstripes (somewhat dated)

Five laws about investing bias, evolution, and true happiness.

1. Leaving the trees could have been our first mistake. Our minds are suited to solving problems related to our survival rather than being optimized for investment decisions.

2. Why does meeting companies hold such an important place in the investment process of many fund managers? Because we need to fill our time with something that makes us look busy.

3. Our minds are not supercomputers and not even good filing cabinets. They bear more resemblance to Post-it Notes that have been thrown into a bin and covered in coffee. The ease with which we can recall information is likely to be influenced by the impact that information made when it went in.

4. Don’t equate happiness with money. Materialistic pursuits are not a path to sustainable happiness.

5. People adapt to income shifts relatively quickly; the long-lasting benefits are essentially zero.

Good stuff! I’m psyched

An interview with Nassim (Black Swan) Taleb at Econtalk:

There’s also a set of links to further reading, as well as transcript of some segments of the above podcast.

In his recent post - The Most Dangerous Word in the Trader’s Vocabulary - Brett Steenbarger warns us traders & investors of the word “should” and the all too common mistake of “getting locked into views of how the market should be trading”.

Should can turn a winning day into a psychological loser, when a trader focuses on that move he or she should have traded. Should can make us miserable when we don’t live up to our personal or financial expectations. Sometimes we focus so much on how we should trade or on how others tell us we should trade that we drift away from our own talents and interests.

Food for thought.