Create a Smarter You with an Unbiased Mind
Create a Smarter You with an Unbiased Mind
Five Highlights From Chapter 11 of Psychological Analysis by Adam Sarhan
I’m taking the weekend off from my day job, so I’ve had a lot more time for reading than usual this weekend.
I started and finished Chuck Palahniuk’s Consider This on Friday. It was fun, but not nearly as helpful as Stephen King’s On Writing.
Then I started John C. Maxwell’s The 21 Irrefutable Laws of Leadership on Saturday, but it’s going to be too good to read straight through, so I’m also going back to reread Robert Greene’s Mastery.
I’m also making good progress on Project Hail Mary by Andy Weir, reading a chapter or two before bed each night. Reading fiction before bed has been a game changer compared to falling asleep to whatever sporting event is on or a string of YouTube videos.
For the book club reading this week, we’re into Chapter 11 of Psychological Analysis by Adam Sarhan, covering some of the many biases traders encounter. This chapter felt like it took everything I’ve learned from Nassim Taleb and Daniel Kahneman over the years and distilled it down into a simple list of things I will always need to keep working on.
It also offered up a bonus quote to get us into the mood this week.
Mental walls are psychological barriers that prevent us from taking action to achieve our goals. Cognitive biases are like the bricks in our mental walls, and together they can prevent us from reaching our full potential. (147)
If cognitive biases are the bricks that form our mental walls, then we need to understand how each of them works if we’re going to start breaking them down. Let’s get to work!
Anchoring
Anchoring occurs when someone relies too heavily on a single piece of information - the anchor - that impacts future decisions. In the market, traders may become fixated on an old price, their entry price, their exit price, or a recent inflection point (a recent high or low), and that data becomes an anchor and has an outsized impact on their subsequent judgment. (147)
Sarhan leads off his chapter full of biases by highlighting the tendency we all have to anchor our feelings about a particular trade to a specific number that actually doesn’t mean anything at all.
I tend to think of anchoring as a negotiation tactic more than a trading bias, but there is no doubt that it applies here just as well, if not better than it does when haggling over used car prices, which I’m terrible at.
We all fall victim to basing our feelings about a trade on the arbitrary price we paid to enter, and that happens even AFTER we all read about how that anchoring bias is something we need to avoid.
Like each of the biases I am highlighting from this chapter, I’ve learned that anchoring is something that I will never fully overcome, but it is definitely something that I can manage and improve on.
Confirmation Bias
Whatever the reason, their destructive actions are likely subconscious, and they’re not even aware they are doing them. A good trader will focus like a hawk on finding the truth and identifying data that helps produce the results they want in the future - not something arbitrary that happened in the past that is used daily to support their frail ego. (148)
Sarhan’s second bias mentioned in the chapter is the one we all do where we give more weight to evidence that supports our previously held beliefs than anything that would challenge them.
I was going to trim this quote down to just the second sentence, but I wanted to leave in the first one to highlight the point Sarhan makes about this being something we do subconsciously.
That’s right. You’re doing it right now, and you don’t even realize it.
It’s hard to work on eliminating any bias, but it’s especially hard to eradicate one that you don’t even realize you’re struggling with. I don’t have any advice other than to do your best not to let your guard down and always be willing to admit you are wrong.
Risk Aversion
As a trader you do not have to pay rent; you do not need to hire an army of employees or have any other major costs of doing business. So, for me, losing trades are the cost of doing business. They happen to the best of us and they are inevitable. (153)
Sarhan explains that traders who resist putting their capital at risk suffer from their own unique bias.
The fear of being wrong and taking a loss can be crippling, especially if you struggle with self-esteem and are looking to trading as a way to feel good about yourself. I used to have that problem, and it took me more than a decade to show signs of improvement there.
Outcome Bias
Many traders look at one or two losing trades, panic because they “lost” money, and then give up and look for a new shiny object (a.k.a. a new strategy or super-secret formula). If they keep doing that over time, they’ll lose a lot of money. (156)
Sarhan does a fantastic job of pointing out that you cannot use the outcome of any handful of trades to formulate an opinion on the validity of your overall process.
The part about divorcing the outcome from the process is something I have a good understanding of at this point, but that second part about letting those outcomes push you to look for a “new shiny object” hit home for me.
It’s been a rough year for growth stock traders, and every time I close out another small loss on a trade, I think about how I’m not making any money doing this and perhaps should be attempting to do something else. When I try, I lose money doing that too. (Remember a few weeks ago when I was going to dabble in commodity ETFs???)
Personal Blind Spot Bias
Someone with a personal blind spot bias cannot see themselves objectively. It’s easy to point out other people’s weaknesses, but it can be hard to admit our own. (159)
If you can’t see yourself objectively, you can’t improve on the things that are holding you back. You have to take a very close look at yourself to evaluate just what you could be doing differently to create better results.
I deal with this one all the time. I actually spent the past week at work pointing out to my team how easy it is for all of us to point out the things our coworkers do wrong while making excuses for our own shortcuts.
Like the other biases covered here, there is no easy way to watch out for this one, so the best thing that any of us can do is be aware that it exists and stay vigilant in keeping it out of our trading.
Next week, we’re rolling into Chapter 12 of Psychological Analysis, where we will dig deeper into how to use this understanding of biases to break down those mental walls we build to separate ourselves from success, which sounds like exactly what I need right now.
Have a fantastic and profitable week!
As always, the comments are open if you want chat. Just click the link at the bottom of this email.