The Cognitive Development of the Trader

Jean Piaget, the Swiss biologist who left his mark on psychology, is known for his research on cognitive development. His view was that such development progresses through a series of stages, during which our internal maps of the world become increasingly differentiated. Piaget viewed people as scientists, continually testing and refining their hypotheses about the world. We both fit our perceptions to our maps (schema) and adjust those maps to accomodate discrepant perceptions, according to Piaget. This provides cognitive stability, even as it facilitates growth and development.

Howard Gardner has added to the cognitive development literature with his recent text "Five Minds for the Future". He argues that five kinds of thought process are essential to successful functioning in a world of increasing information and complexity:

1) The Disciplinary Mind - Mastery of ways of thinking specific to particular fields of study and work;

2) The Synthesizing Mind - The ability to integrate ideas into a whole and communicate broad understandings;

3) The Creating Mind - The ability to generate novel questions, answers, and understandings and assemble existing information into new, illuminating frameworks;

4) The Respectful Mind - The capacity to appreciate and draw upon diverse forms and sources of knowledge;

5) The Ethical Mind - The understanding and discharging of personal and professional responsibilities.

Gardner's fascinating observation (that places him in the Piagetian camp) is that these forms of mind emerge in a progression. We start with a Respectful Mind and an openness to information and experience. Under tutelage and mentorship, we then acquire the knowledge and ways of thinking associated with a particular line of work or profession, the Disciplinary Mind.

As we accumulate knowledge, we learn to relate pieces of information to one another and develop larger understandings--the Synthesizing Mind. For example, medical students will draw upon their knowledge of biochemistry and anatomy to grasp principles of pathology, and they will synthesize their knowledge of pathology to help them diagnose diseases in patients.

With the ability to synthesize information and perceive larger patterns in nature, the advanced thinker becomes able to perceive new relationships: the Creating Mind. That medical student, for instance, might go beyond textbook definitions of illnesses to perceive an emotional component to a patient's presenting problems, opening the door to a fresh way to tackle a longstanding problem.

Throughout this developmental sequence, the learner acquires from mentorship a sense for the standards of a particular line of work or profession: obligations to self and others. This is the Ethical Mind, and it guides how knowledge is ultimately deployed. One distinguishing element of a profession is its formulation and cultivation of a set of ethical principles.

When I first read Gardner's account, I was struck by how well it fits the developmental process of trading that I experience in the best trading firms.

Developing traders are encouraged to approach their craft with an open mind, consulting multiple sources of information--from media to peers and original research--to generate trading ideas. They also are taught ways of thinking specific to the kinds of trading that they're doing. Market makers in derivatives, for example, think very differently about trading than do portfolio managers mutual funds.

Ultimately, whether the trader is piecing together order flow information at a bank desk or macroeconomic data for a fund, he or she engages in a synthesis of findings which helps transform them into actual trading and investment ideas that capture broader understandings of supply and demand.

The best traders think creatively about their markets, seeing relationships not obvious to the rookie observer. Currency movements are seen as connected to sector performance within equities; the pulling of offers in the order book for stock index futures is linked to a breakout rise in bonds. Traders will sometimes tell me, "This market reminds me of 1987 (or 1997)", and then weave the similarities and implications. That is the creative process at work.

Moreover, traders at the best firms acquire a sense of duty and responsibility that defines their ethical thinking. They have a responsibility for capital, a duty to investors, and certainly obligations to themselves and their families. Integrity is a watchword at firms that handle other people's money; without that, trust is lost--and so are assets.

A child thinks in simple ways with undifferentiated understandings. When my daughter Devon was very young, she watched a tape of herself on TV and her jaw dropped open. She turned to me and exclaimed, "Two Devons!" She did not understand, at her age, that the videorecording was of her. Instead, she assumed that there must be another Devon.

Similarly, traders begin their careers with very simple--and often equally magical--views of markets and market movements. Later, they understand that traders and investors operate at differing timeframes, that markets are interconnected, that themes abound in markets, and that probabilities and departures from value govern trading opportunities. With this development comes a richness of mental maps and the fivefold cultivation of mind noted by Gardner.

RELATED POST:

Pain and Gain in a Trader's Development
.

How Prop Firms Can Attract the Right Talent

My recent post took a look at how traders can make themselves attractive to proprietary trading firms. Now let's take a look at how prop firms can attract promising trading candidates.

The best way that prop firms can recruit top people is by being ethical and honest. Please take a look at the extraordinary post from Bella at SMB Capital on "The Failure Rate of a Proprietary Trader". How many prop firms would dare talk about failure and the sobering reality that the majority of prop traders don't sustain a living from trading? How many would play down the promises of riches and, instead, emphasize the importance of hard work and skills building?

Kudos to SMB for telling it like it is. It's one reason I'm honored to work with the firm. (And, no, they didn't solicit this post).

As Bella emphasizes:

"The market requires that you become an elite performer. Most people can 'punch the clock' at their jobs, do average work, and be appreciated by their employers. Heck you might even get promoted. Try this as a trader and the market will swallow you like a shark does squid. The best trader on our desk grinds it out daily like a steam pipe fitter."

Ultimately, all any prop firm can do is what a college basketball or football team can do: give you the best shot at big league success possible. The coaches can provide the training, teach the plays, and offer the encouragement--and then it's up to each player to make the most of practice and playing time.

So if you interview at a prop firm, listen for pie-in-the-sky promises and listen for tough love about the challenges of trading. If one firm lures you with the promises and the other encourages you to think long and hard before taking the challenge, you'll know the firm to choose: the one with the integrity to acknowledge and assist the steep learning curve ahead.

More:

Prop Firms and Scams

Steps Toward Joining a Prop Firm

.

Doing Well and Doing Good: Trading as a Gymnasium

Some would have it that there is little ethical good in trading, implicitly or explicitly accepting the premise that what is good is what we do for others.  This creates a schism between doing well--earning profits in markets--and doing good.  Not a few traders in my experience have been caught in that dichotomy, undermining both their trading and personal success.

Wealth, Ayn Rand once observed, is the product of our capacity to think.  There is no surer road to ruin in markets than to follow the herd.  It is the independent mind, the capacity to see what others don't, that brings trading and investing success.  As markets continually evolve, success requires that we evolve with them.  Who among us has not known the once-successful trader who now cannot make money in changed markets?  Trading requires not just the ability to make ourselves, but also the capacity to continually remake our viewing and our doing.

Once we see trading--or any great performance field--as a crucible for self-development, then there is no schism between what makes us good and what makes us successful.  My capacity to make decisions in fast market conditions has often come in handy in difficult family circumstances.  Principles of risk management that inform my trading have also helped me hold winners and exit losers in career opportunities.  Recognition that I cannot digest everything in markets daily has pushed me to find like-minded others and build mutually rewarding collegial relationships.  I have learned to become a more patient parent and spouse by markets that required my patience.

Any performance domain is a gymnasium that gives us the opportunity to exercise the best within us.  The right workouts help us earn the status of the 1%--in our relationships and careers, as in our bank accounts.

Further Reading:  Objectivism and Trading