Janice Dorn, MD, PhD
Neuropsychological Trading Coach
Janice Dorn, M.D., Ph.D., has been a full-time futures trader since 1994. Doctor Janice holds an M.D. in psychiatry and is board-certified by the American Board of Psychiatry and Neurology in general psychiatry and addiction psychiatry. She holds a Ph.D. in brain anatomy. A graduate of Coach University, she is a pioneer market psychiatrist and financial neurobehaviorist. Doctor Janice has written over 500 articles on the financial markets and coached over 600 traders worldwide. She is the Global Risk Strategist for Ingenieux Wealth Management Group, Sydney, Australia.
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The greatest obstacle to discovery is not ignorance—it is the illusion of knowledge...Daniel Boorstin (1914–2004, Librarian of Congress Emeritus)
There is something I need to tell you tonight that some of you may not like to hear. Many people have told me again and again how much they know, when it is clear that they don't know as much as they think they know. Or, as I put it when discussing the levels of competency, "They don't know that they don't know, and they don't know what they don't know." Some of them have called me "less than courteous" for even mentioning this. However, after 40-plus years of studying the brain and behavior, as well as 13 years of full-time futures trading, I am telling you that the more I study and learn, the more I realize how little I know. This is a humbling revelation, and while it can be painful, it's also necessary.
Today, I would like to share some of the lessons I've learned over the years in the name of raising your brains to an ever higher level of sophistication so that you will become aware. As I do so, I implore you to wake up, examine yourself with the most sophisticated, high-resolution microscope available, and be honest with yourself about what your brain is doing to confuse you, deceive you and just plain mess up your trading.
We are not done with this overconfidence bias. Many of you continue to assert that you really do know what is going on, and you are pretty darn confident that you have reached the final stage of trading mastery and really can trade successfully year after year. In some cases, this is true. In the majority of instances, however, this is likely to be found wanting. The four major hallmarks of misplaced overconfidence are excessive pride and boasting, failure to listen to those who tell you when you're wrong, refusal to get feedback about the outcome of one's activities, and not planning for problems, consequences and corrective measures in advance.
Remember my question about the capital of Kentucky? How many of you were certain that your pronunciation of the capital of Kentucky was correct? Some of you responded with "LOL" and a few with "Hey Dr. J, you don't know how they REALLY pronounce Louisville…he he!" I received no correct responses to the question. That's zero, zip, nada! The silence was deafening. As I discussed in the Trading Wisdom for January 21, the correct answer is not Louisville, but Frankfort.
However, I digress—let's get back to this overconfidence bias in the hopes of putting it to rest for the month and moving on to the many other cognitive (thinking/brain-induced) biases that impact our trading.
Let's try this one on for size:
The DJIA closed at 9,181 on the last trading day of 1998. This number does not include reinvested dividends. If the DJIA were recalculated to include all dividend reinvestments since it started trading (in 1896 at a price of 40!), what would the closing number for the DJIA have been on December 31, 1998?
Please give your best guess. After you have written down your best guess, write down a high guess and a low guess so that you feel 90% confident that the true answer will lie between your high and low guess. We have some pretty sharp people here at www.trending123.com, so I expect some awesome calculations and answers.
I'll wait until at least 10 people have e-mailed me (janice@thetradingdoctor.com) their best guess and their high and low guesses to give you the correct answer. Remember that you will be confident at the 90% level that the correct answer lies somewhere between your highest guess and your lowest guess. Bring it on, people! Let's see how well you can calculate and how confident you are in your guesses. As soon as I receive 10 responses from 10 different people, I will post the correct answer on the Trading Wisdom section of the www.trending123.com Message Board.
Doubt is not a pleasant condition, but certainty is absurd...Voltaire
Are we having any fun yet?
I suspect we will be leaving this topic temporarily and moving on. But, like The Governator, we'll most certainly be back. Why? Because overconfidence permeates every aspect of our lives, including trading. It is one of the most common ways in which traders sabotage themselves, over and over again.
A growing amount of literature shows that misplaced confidence in judgment of the trader or investor (including all manner of traders, investors, money managers and market prognosticators) leads them to believe that they can predict the future by knowing what happened in the past. To compound this overconfidence bias, there is also a tendency to actually distort past events and the recollection of these events. (This tendency is called hindsight bias, and we will get to it in the future.)
Given the inadequacy and fallibility of human judgment and decision-making, particularly in the stress-ridden environment of the trading day, it is critical that traders become intimately aware of how overconfident they are and how this will affect the way they interpret what they see, hear and read about the markets.
Before you attempt to beat the odds, be sure that you could survive the odds beating you...Larry Kersten (American sociologist and author)
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