Wednesday, June 18, 2008

Trading, Intuition, Brain, and Body

An excellent slide show presentation from Jason Zweig, entitled Money and the Mind, illustrates how trading and investment decisions are colored by events in the body. An interesting quote that he draws from cognitive neuroscientist Antonio Damasio is:

"We make judgments not only by assessing probabilities and consequences, but also (and primarily) by evaluating their emotional attributes."

This is related to Damasio's "somatic marker" hypothesis: that we judge right and wrong, good and bad, from emotional consequences, and we associate certain bodily states with these consequences. When I decide to not eat a food that is bad for me, it's not a purely abstract, reasoned judgment. Rather, the decision is suffused with a physical sense of dislike when I am emotionally connected to the consequences of the eating.

These somatic markers help to explain the (literal) feel that traders can develop for markets after long exposure to patterns of supply and demand. The decision to buy or sell is suffused with physical cues associated with loss and gain: those somatic markers cue our decisions and actions.

We commonly think of opportunity as a function of market variables: volume, volatility, trending, and the like. But what if opportunity is more a function of one's access to his or her somatic markers? Might this be why traders so commonly view emotion as the enemy of good trading: the "noise" from overconfidence, fear, or greed drowns out the more subtle markers that alert us to risk/danger and reward/opportunity.

If we cultivated skills (self hypnosis, meditation) to still the flow of thought and emotion, would traders who had internalized market patterns display a superior access to their implicit learning and enhance their performance? This is a most promising area of investigation.


Somatic Markers and Trading Decisions

Emotional Intelligence and Trading- Part One

Emotional Intelligence and Trading - Part Two