Tuesday, January 29, 2008

What Makes an Expert? Three Surprising Research Conclusions

The goal of every serious trader is to acquire expertise: the ability to succeed across a variety of market conditions over time. A recent study that I reviewed found that such expertise is rare indeed, perhaps as uncommon as 1 in a thousand. The same researchers, however, found that such expertise *does* exist: a small core group of traders persist in their success year after year.

So what makes an expert? How can traders guide their own development and become expert traders?

A research summary from K. Anders Ericsson, a leading researcher in the field, offers three surprising conclusions:

1) "Measures of general basic capacities do not predict success in a domain" - Experts cannot be distinguished by their superior intellects or other cognitive talents. This suggests that, while certain inborn traits and lack of capacities might prevent the development of trading expertise, the presence of particular native talents cannot ensure success.

2) "T
he superior performance of experts is often very domain specific and transfer outside their narrow area of expertise is surprisingly limited" - Being an expert in one domain does not predict expertise in others; a person can be a highly accomplished trader, but not expert in other areas. Moreover, a person can be an expert scalper or portfolio manager and yet fail at other forms of trading. This is the notion of "niche" that I describe in my book: the successful trader has found a particular sphere of success that expresses his or her skills and interests.

3) "Systematic differences between experts and less proficient individuals nearly always reflect attributes acquired by the experts during their lengthy training"- A saying among expertise researchers is that practice does not make perfect; perfect practice makes perfect. The expert is one who has undergone a structured, deliberate process of training that builds competencies, offers extensive feedback, and draws upon intensive effort over time to internalize knowledge and skills.

What does this mean for traders? Here are three conclusions of my own:

1) The majority of traders are looking for expertise in all the wrong places. They look for *the* right trading charts, indicators, setups, or systems. They are like beginning golfers who think they'll succeed if they only get the right set of clubs. Because they hope to get "the answer", they expect success in a year or two. The research is unequivocal: expertise develops over a period of many years. If those years are not structured properly, traders will repeat a single year's experience ten times; they won't acquire ten years of experience.

2) The vast majority of offerings in trader education are not structured for expertise development. Seminars, books, Web articles and blogs, weekend courses--all can be useful in imparting information. But expertise development is not simply about the accumulation of information; it is about skill development under realistic, challenging conditions. No doctor, athlete, or musician could acquire expertise by attending seminars or reading books alone. The same is true for traders.

3) The reason most traders fail is that they never enter a path of expertise development. It is rare to find training programs of any quality and substance at proprietary trading firms; one finds mentorship at investment banks and some hedge funds, but this is very hit or miss depending upon the commitment of the mentor and his/her skill in imparting skills and structuring a learning process. The independent trader has even fewer resources to generate and sustain an accelerated learning curve. There is much more to acquiring expertise than keeping a journal and trying to follow a simple plan.

So what does a trader need to progress from being a novice toward becoming competent toward exhibiting expertise? A curriculum: a structured process, like physicians undergo, that begins with information and understanding and then progresses steadily through skill development. In my next post on this topic, I'll explore what such a curriculum might look like.


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