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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It is one thing to show a man that he is in an error, and another to put him in possession of truth...John Locke
I promised you that 2007 would be a year for you to learn about cognitive biases. I know—it sounds a bit daunting—but, at the heart of these cognitive (thinking) biases, are all the mistakes you make as a trader and investor. So, I really can't let March go out like a lamb without telling you yet another way in which your brain tries to mess with your trading.
Let's review what we have learned so far. First, there was the mental accounting bias as shown so colorfully in The Man in the Green Bathrobe (Part I, Part II). Next, there was the capital of Kentucky quiz and follow-ups which illustrated the overconfidence bias (Part I, Part II, Part III). Please take some time to look over each of these, plus the postings on the Trading Wisdom section of the message board at www.trending123.com.
Cognitive biases are all about the way we think, the operative words here being cognitive (thinking) and biases (prejudices). It is these biases and the way that we hold on to them, often in the face of massive evidence that they are not serving us well, that cause us to make trading mistake after trading mistake. Moreover, since our brains are hard-wired for biases, it is difficult to change them without some kind of internal disruption occurring. This resistance to change and the acting out of one or the other bias has two effects on your trading and investing: You do the same thing over and over again, and you expect different results every time you do it. This is, as you are aware, one definition of insanity.
In order to push through the biases that are holding you back from becoming a profitable trader and investor, it is critical to embrace your own personal bias base so that you can make changes. How do you make changes? You retrain your trading brain. This is done through consistent coaching and practice. It takes time, but it is completely doable, and it works if you work at it! I will show you some examples of how to retrain your brain in upcoming Trading Wisdoms.
For now, let's get on with the cognitive bias of the month!
Each of us has a relatively fragile sense of self-esteem.
The human brain has many ways of protecting against assaults on the fragility of self-esteem. The self-attribution bias manifests as a tendency for good outcomes to be attributed to skill and bad outcomes to be attributed to just plain hideous bad luck.
A decision matrix for self-attribution bias looks something like this:
In other words, heads was skill, and tails was bad luck!
This type of thinking is one of the biggest obstacles that traders must push through in order to become successful. Why? Because the only way for them to gain consistent profitability as a trader is to recognize and take full responsibility for their own mistakes. It is only by comparing your decisions and cross-referencing the outcomes that you can come to some understanding of where you were skillful and where you were lucky. This is yet another reason to keep a detailed trading journal and to dissect each trade in the self-attribution context.
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Good Outcome |
Bad Outcome |
Right Reason |
Skill |
Bad luck |
Wrong Reason |
Good luck |
Mistake |
Here are some questions for you to ponder over the weekend, as they pertain to this bias and how it is interfering with your trading success:
- When are you lucky and when are you skillful?
- Are you right for the "right" reason, or are you right for some other reason?
- Does it matter, as long as you are right?
- How do you measure and "fess up" to mistakes—i.e., recognize mistakes as mistakes by taking personal responsibility and accumulating regret?
- Is it important to do this, and why or why not?
- How and what do you learn from this?
- Why is it important to learn from this?
You should examine yourself daily. If you find faults, you should correct them. When you find none, you should try even harder...Israel Zangwill
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