Wednesday, February 17, 2010

Intuition, Luck, and Anxiety in Trading

Two recent posts dovetail, with interesting implications.

Recall the post on what makes people lucky: one research finding was that tense people tend to be unlucky ones. By focusing on threat, they miss potential opportunity.

Now go back to the post on intuition. An important research observation was that dampening explicit thought aided access to a person's gut feel.

These findings are not unrelated. A good part of what we call luck may involve intuitive access to information that unlucky people lack. A while back I was driving into Chicago before rush hour and started to shift into the left, express lane. Something didn't feel right, however, and I moved back into the right hand, local lanes. After a while, I saw that there was an accident in the express lane; traffic was snarled, but the local lanes moved normally.

I felt lucky, but what I believe actually happened is that the ratio of cars in the express lane relative to the local ones felt too high. Intuitively, I sensed that the express lane shouldn't be that busy when local lane traffic was light. In retrospect, I was sensing the beginning of the traffic build-up following the accident.

Now, had I been highly anxious about getting to work on time, I would have felt a press to use the express lane. I would have ignored any intuition--or, more likely, wouldn't have felt the discomfort in the left lane at all--and, voila!--I would have been unlucky. By focusing on my source of anxiety, I no longer could receive the more subtle signals from the gut.

I believe that this is a major reason that anxious, stressed traders are invariably poor traders. Much of short-term trading boils down to pattern recognition, and much of pattern recognition boils down to a feel for markets that results from long periods of observation and internalization. When we are feeling tense or frustrated, we easily lose a feel for markets.

And that can make us unlucky.