Sunday, June 29, 2014

Weekend Ideas

Here are a few interesting ideas gathered this weekend:

*  Here's a post that caught my eye on the Dunning-Kruger effect--a cognitive bias in which people who don't know tend to also not know that they don't know.  This excellent article puts the DK effect into context and makes the observation that experts are more likely to accurately assess their level of knowledge and success--and even modestly understate their gifts--relative to those who are poor performers.  I have consistently found that to be the case in the trading world: less sophisticated participants seek levels of percentage of return that are never consistently achieved by the expert performers, whereas elite money managers tend to be humble about their current and future performance.  

*  Thanks to a savvy trader at SMB for pointing out this article on collecting cortisol levels via smartphone.  This very much fits with the Quantified Self movement, which uses real time technology to collect ongoing data regarding our lives and functioning.  Check out this fascinating post on rhythmanalysis, as well as this post on mapping and tracking your happiness.  It's only a matter of time before such projects assemble into big data efforts that tell us much more about psychology than ordinary (biased, limited) self-report.

My last post has me thinking about the information that should ideally appear on a market chart.  What I realized is that there is almost no overlap between any chart review I perform and any quantitative analysis I undertake.  That doesn't seem right.  What if a chart visually captured backtested patterns from market research?  I'm working on it...

*  Along that same line, I wonder if you took 100 traders and gave them access to market charts and X pieces of data that they found most relevant to making trading decisions.  They would follow the same market for the same time period.  Would the number of trades taken be a measure of the Dunning-Kruger effect?  By the way, here's the original paper on the effect.  The abstract neatly states their thesis.

*  Thanks to Abnormal Returns for the link to the article on diversification and the observation that diversification smooths emotions as well as investment returns.  This strikes me as a broader life principle:  those who are diversified in their sources of well-being are more likely to sustain consistent well-being than those with their psychological eggs in a single basket.  One of my observations is that traders who sustain long-term success enjoy studying markets and understanding what is driving them as much as they enjoy trading.  That gives them positive outlets when there are no trades to be had.  When trading is everything, it's not surprising that everything is approached as a trade.