Sunday, October 25, 2015

Learning From Our Genius--And Our Idiocy

Sometimes, the best path to creative insights is a willingness to challenge one's premises.  Suppose, for example, we don't define genius by a fixed IQ level.  That, of course, implies that some people are geniuses and the majority are not.  If we begin with the premise of multiple, intersecting intelligences, it opens the door to the possibility that everyone is a genius in some respect.  I learned this vividly when I first began working with active daytraders in Chicago.  Many of the successful traders were not intellectual in the least, but they had a canny sense of rapid pattern recognition that I, with my Ph.D., could not touch.  Similarly, I have seen very successful money managers lead teams and make boneheaded decisions when it came to managing their team members.  Managing capital and managing human beings represent different skill sets; not all who are classically intelligent are emotionally or socially so.

There are two important implications of the "multiple geniuses" perspective.  The first is that we are most likely to find success if we know our strengths, hone our strengths, and play to our strengths.  Many thanks to Ivaylo Ivanov for picking up on this in his excellent summary of the Trading Psychology 2.0 book. One of the takeaways that he emphasized is that we never find success by discovering an edge and sticking to it religiously through life.  Rather, edges in markets continually evolve and, like all entrepreneurs, traders succeed by adapting to their evolving marketplaces.  The question of finding one's success as a trader (or remaking one's success) begins with a more fundamental question:  In what respects am I a genius?  What am I truly good at?  How can I leverage those strengths in the current market environment?  It's our strengths that will fuel strong performance, not our copying of others.  Perhaps the trader who feels stupid is like the fish judging itself on tree climbing.  No amount of efforts to improve climbing will help the fish; only the decision to get in the water and swim.

That brings us to the second--and perhaps more provocative--implication of the multiple geniuses view.  If all of us are geniuses in some respect, all of us are also idiots in some fashion.  We have our blind spots, our weaknesses, our flaws.  If it's our strengths that fuel our success, it's our weaknesses that can derail us.  Indeed, sometimes it's excessive reliance on our strengths that makes us idiots!  I recall one occasion in which a very bright friend proceeded to respond to his partner's distress by offering a detailed analysis of the situation.  It was an insightful explanation--and it was idiotic in the context of the partner's need for caring and reassurance.

It's not by coincidence that the subtitle of Ivanov's blog is "Reaction to news is more important than the news itself".  Our own genius and idiocy is parallel to the wisdom and madness of crowds.  The markets do forecast future economic developments--and they do so quite imperfectly.  The tech bubble around the turn of the millennium was a great case in point.  It was an idiotic overreaction--and it correctly anticipated a revolution in computing and online communications.  Observing reactions to news and other events and parsing out what is wisdom and what is idiocy is essential to investors and traders alike.  Trend trading and countertrend trading are flip sides of a single coin, in which market movements begin with insight and end with blindness.

Further Reading:  Emotional Volatility and Market Returns