Thursday, August 28, 2008

Implicit Learning, Single-Trial Learning, and Trading Performance

In my last post, I suggested that much of trading performance hinges on implicit learning and that psychological factors impair performance to the degree that they interfere with access to what we know (but don't necessarily know that we know). A wealth of research has demonstrated that people can learn artificial grammars without being able to verbalize the rules underlying those grammars. Interestingly, patients with total amnesia still retain the ability to perform routine tasks, such as tying shoes. In such cases, people exhibit learning that is not explicit. The hallmark of such learning is that it has not be acquired through the usual means of study, but rather by frequent repetition.

Another line of learning research pertains to single-trial learning. In some cases, repetition does not seem to be needed for learning. Rather, a single exposure can generate lasting learning. This goes against the notion that significant study is required for explicit learning and that significant repetition of patterns is needed for implicit learning. It is significant that typical examples of single-trial learning involve novelty: the more something stands out in our experience, the more likely we are to process it in a lasting way. A good example of this is taste-aversion. I'm in Singapore now, where the durian is a renowned fruit. It has an extremely powerful odor, which some find appealing and others find offensive. A single exposure to the durian for those who find it overpowering will result in a permanent impression: it is unlikely to be forgotten!

Conditioned fears can be similar examples of single-trial learning. We see this most powerfully in post-traumatic stress disorder: a single, highly stressful event can produce lifelong patterns of avoidance, anxiety, and withdrawal. After the trauma of rape, for example, a woman learns completely different associations to men, altering her behavior.

Novelty and the emotional conditioning power of experiences are not all-or-none variables. Some events are more novel or more emotionally impactful than others. These are the ones most likely to stick in memory. Research into the process of psychotherapy finds that the items recalled from sessions--and that affect clients most--are those that are novel and emotionally laden. This is not necessarily single-trial learning, but it *is* accelerated learning.

One factor that seems to separate successful therapists from less successful ones, for example, is their ability to generate novel, emotionally-impactful experiences for their clients. One client is afraid of change and talks about it with others in group therapy; another client has the same fear and is suddenly asked to change by leading the group. Navigating this experience successful shows the person that change need not be threatening. This is much more likely to be internalized than a simple verbal message that says, "Change need not be threatening."

Where traders often fail in their development is that their most novel and emotionally powerful events tend to be negative ones, particularly ones of losing money. This may not generate single-trial learning, but repeated with even modest frequency may generate a kind of implicit learning in which certain kinds of market participation are linked to particular negative outcomes. Like all implicit learning, this is unlikely to be consciously verbalized. Rather, it is evident in the moods and behaviors that suddenly change under particular market conditions.

It makes sense to many people that pattern recognition can be the result of implicit learning, particularly among high-frequency traders. What may not be so clear is that the problems that beset traders may also be the result of an implicit process in which what is learned is accelerated and cemented by high degrees of novelty and emotional impact. If that is the case, explicit discussion with coaches or therapists may not be the most effective way to deal with these problems. Rather, purposeful positive learning under heightened conditions of novelty and emotionality may be most effective. That could help to explain why classical conditioning therapies, such as the exposure methods that I wrote about in Enhancing Trader Performance and that will be a part of my new book, are particularly effective for such problems as traumatic stress and performance anxieties.

If we can learn to structure and accelerate our learning to maximize the depth and speed of knowledge and skill acquisition, this has powerful implications for improving trading performance and dealing with the psychological forces that impede performance.