Wednesday, August 13, 2014

Replicating Talent: What Trading Can Learn From Chess Education

The recent post suggested that there is a meaningful overlap between the cognitive talents required by chess and trading.  Where traders can probably learn the most from chess is in the learning process.  While the cognitive strengths of the two domains overlap, the ways in which they are channeled and developed is typically quite different.

How does someone learn to play chess at a high level?  A look at a site devoted to the educational process provides some insight:

1)  Developing chess masters view and review games and key moves in a hands-on way- This is a staple of chess learning.  Illustrative games are archived for future players to review.  Many times, accomplished players annotate the games, providing insight for the learner.  Learners do not simply read the games from a text or watch a video.  Rather, they play the games move by move on a chess board, so that they actually see situations set up and actively think through each move.  This viewing and re-viewing provides the chess student with many, many games worth of relevant experience before he or she ever sets foot in a chess tournament.  This is not only deliberate practice, but deliberate practice guided by recognized experts. 

2)  Developing chess masters break the game down into key components and build their skills one component at a time - Once players master the basics, they hone their skills with different facets of performance.  They work on their openings, their midgames, and their endgames; they learn various defenses and how to play against them.  Computer applications offer targeted learning opportunities and provide relevant feedback, as can live lessons with a coach/mentor.  Just as an American football team would devote training time to specific plays, offensive sets, and defensive strategies, the budding chess master works in a focused way on specific parts of the game to master domain-specific skills.

3)  Developing chess masters learn from true masters - This is very important.  Accomplished chess players carry a ranking based on their performance in tournaments.  That ranking is publicly verifiable and based upon objective performance.  A developing student can learn from the world's top talent through live lessons, but also through training materials assembled by recognized experts.  Because each tournament game is publicly recorded move by move, every person has access to what the greats do--and have done.  

These three characteristics of chess education rarely occur in concert in the world of trading and investment.  Yes, there are valuable simulation platforms that allow practice trading, and there are review features for those platforms that enable the learner to learn from recent experience.  What is typically missing, however, is the expert input that breaks trading down into meaningful components, models successful skill deployment, and provides immediate and relevant feedback for learning.

This is why I find the best learning occurs within trading teams at established hedge funds, banks, and proprietary trading firms.  When an accomplished trader brings on junior talent--often junior talent with specific areas of expertise that contribute immediately to the business--the whole of the team becomes more than the sum of its parts.  The team becomes a dynamic start-up business within an established business. 

Imagine, for example, a senior portfolio manager hiring a junior team member with experience in options.  The junior hire helps with the structuring of positions in the portfolio, creates appropriate hedges, and provides insight to the team in terms of options-based sentiment measures.  The senior manager provides daily instruction to the junior member, helping build skills in such areas as idea generation and risk management.  This is a powerful model, because the learning occurs in real time, in real situations, from real experts, with real integration of coaching and mentorship.  It's also a sustainable model, because there are tangible benefits to mentors and students.

Suppose those teams archived and annotated their experience the way that chess masters do.  Over time, multiple teams could contribute to a central learning database that captures the wisdom of the experienced traders--and also their core skills.  The model of "siloed" traders operating in isolation is inefficient.  Can any one individual truly stay on top of a complex, global financial world?  In leveraging talent the right way, all parties benefit:  talent becomes replicable.

Further Reading:  A Different Kind of Proprietary Trading Group