Tuesday, August 19, 2014

Paying the Tuition for Your Intuition

Here's a shoutout to worthwhile observations about intuition from Abnormal Returns.  A key concept from that post is that intuition is not a mystical given:  it has to be earned.  Per the Einstein quote, the rational mind is a faithful servant to the degree that it accesses and assembles the raw materials for creative processes.  Analysis precedes synthesis:  we break things down in order to reassemble them.  Before the pianist delivers an inspired performance on stage, there is much work done on finger technique, expression, and cadence.  The creative chess move follows from hours of board study and play.  Whenever we see gifted intuition, we can identify the tuition paid in terms of deliberate practice.

A good illustration of this is that I do not have any productive inspirations about domains with which I have no familiarity.  No light bulb goes off over my head regarding such fields as ice skating or theoretical physics.  On the other hand, I have spent countless hours studying the short-term action of the stock market.  It is rare that I don't have a week where I think of some new way to parse data and make sense of market behavior.  

The key concept here is that intuition is earned with disciplined effort.  And disciplined effort typically involves immersion in decidedly uncreative work.  Medical students first learn the mechanical processes of taking down a history and physical before they are able to assemble those pieces into an insightful diagnosis.  Indeed, what one finds in professional education is similar to what occurred during the apprenticeships of great artists:  first there is a mimicking of the master and only later are there elements of originality that appear in the reassembly of the units of learning.  There can be no creative reassembly without the detailed labor on the individual pieces.

So what bridges the transition from analysis to synthesis, from working on the pieces to assembling a new whole?  Very often, the mindset that is necessary for the servant work--intense focus and immersion in observation and doing--is not the one that is necessary to receive the sacred gift described by Einstein.  Check out Zabelina and Robinson's study of using a childlike priming to inspire creativity.  A short exercise of thinking like a child stimulated subsequent creative thought.  Often one will hear researchers talk about "playing with ideas".  It may well be that the hard work of analysis requires free play before it yields fresh syntheses.  If, as Josh Brown hypothesizes, it's getting what's in your head into your gut that differentiates exceptional returns from mediocre ones, the process of play may be every bit as important as our work processes.

When an experienced trader has trouble adapting to changing markets, doubling down on work effort may not be the solution.  Ironically, that trader may need more play time with ideas.  Conversely, the struggling market newbie needs less time winging trades from the gut and more time mimicking the experts.  In trading as in poker, those who fail to pay the tuition required for intuition are merely into wishin'.

Further Reading:  The Role of Intuition in Trading Decisions