Brain function and trading

[nitro]

Quote from Thunderdog:

Except that the "once in a hundred years" keeps happening with far greater regularity than advertised.

I strongly agree. Hence the remark that we do not have a highly developed brain area for fat tails.

I remain unconvinced about "good" traders who repeatedly succumb to fat tails. You are essentially describing Mr. Victor Niederhoffer, who strikes me as little more than a pig at the trough who didn't see the butcher knife in time perhaps once too often.

I strongly disagree. I would say that one in a 20000 traders would have achieved the consistent level of returns that VN did for umpteen numbers of years. I suggest that you listen to the message of this thread. Maybe 1 in a million traders can make huge returns consistently, AND not blow out.

However, it's a good combo if you manage money and have no pesky pangs of conscience about engaging in a bit of moral hazard.

I think you still have NOT made the distinction.

 

[killthesunshine]

Quote from nitro:

I claim that the best traders are the best "predictive" traders. By that I mean not that we are using fancy math or neural nets on time series. I mean that we have "superior" brain functions that result in better prediction from sensory inputs. But here is the interesting part. The higher brain functions that actually make the prediction, get fed the relevant information to make that final prediction, can come from different parts of the brain, and we favor which brain functions to direct our analysis based on our talents and lack thereof. So, if you are especially adept at visual patterns, but poor at seeing relations in numbers, the input to the predictor function of the brain gets its input from that part of the brain that relates visual patterns, as opposed to another part of the brain that say, recalls a number(s) as the independent variable(s), or another yet that sees patterns in the raw numbers. You will probably become a technical analyst by looking at charts. BTW, this sort of explains why there are lots of traders that are good at sports.

It is well known that different parts of the brain are involved in different functions. For example this is worth understanding:

http://www.neuroskills.com/brain.shtml

On a more simplistic level, here is a beautiful study that shows that the brain compartmentalizes qualitative and quantitative functions:

http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/1999/05/12/MN28876.DTL

All you say here is we use what we got. if you process info in a more 'spatial' way in life & all then surely you will approach trading in same way. if your a numbers man quantitative is the way you''ll go.

big whoop here bud

ps you should be in research researching some minutiae

 

[nitro]

Quote from killthesunshine:

All you say here is we use what we got. if you process info in a more 'spatial' way in life & all then surely you will approach trading in same way. if your a numbers man quantitative is the way you''ll go.

...

As I have stated many times on ET, one can trivialize anything. Human beings are 85% water. Clouds are 98% water. Therefore human beings are 85% a cloud.

There are endless debates on ET about whether technical analysis is hooey, or quantitative analysis is the way to go, or system trading, or on and on. This thread says that as long as you are good at finding the correlates, there may be more than one method that will get you the right answer. It also says that there are brain structures that exist in all of us, and some of us tap into them more easily than others.

Scientists sometimes state the "obvious", and to the masses it seems like we are dealing in minutiae or the completely obvious. But from fantastically simple realizations, often come colossal discoveries. Take the simple historical example of the discovery that the speed of light is constant in all reference frames. The consequences of that simple statement are no less than astonishing.

 

[MAESTRO]

Some people are surprised to learn that one portion of the brain could generate irrational herding behavior, while a more rational portion of the brain might be unconscious of this herding dynamic. Shiller’s survey-based study of the stock market crash of 1987 is a good example of the discrepancy between what investors say is the reason for a large price movement and what they actually did as they sold their stock in droves. The survey revealed that the most frequent reasons given for the crash was that the market was “overpriced” and that large institutional investors were selling when the market hit “stop-loss” points. These ideas sound rational and at least roughly related to fundamental analysis or rational trading techniques. Shiller’s research found, however, that on the day of the big crash, an astounding 43% of his random sample of institutional investors was experiencing unusual symptoms of anxiety (difficulty concentrating, sweaty palm or rapid pulse). In contrast to the calm reasoning process of selling they reported in the survey, these investors were actually found to be “…people reacting to each other with heightened attention and emotion, trying to fathom what other investors were likely to do, and falling back on intuitive models….”

Strong emotions are catalysts for spontaneous herding behavior which, in tern, creates strong decision making BIAS in the stock market.

 

[Thunderdog]

Quote from nitro:

...I would say that one in a 20000 traders would have achieved the consistent level of returns that VN did for umpteen numbers of years...

By essentially buying the dip mindlessly, so to speak, until and after it is too late? He seems to have made excellent returns by not appreciating the risk he incurred in doing so, until it became too late. Anyone can take a flyer and some will succeed over a length of time simply by chance. Personally, I think it is consistency and survival that distinguishes a trader. The very thing that made VN money is the very thing that blew him up, so I wouldn't be too quick to aggrandize that quality. Just my opinion, of course.

 

[killthesunshine]

Quote from nitro:

As I have stated many times on ET, one can trivialize anything. Human beings are 85% water. Clouds are 98% water. Therefore human beings are 85% a cloud.

There are endless debates on ET about whether technical analysis is hooey, or quantitative analysis is the way to go, or system trading, or on and on. This thread says that as long as you are good at finding the correlates, there may be more than one method that will get you the right answer. It also says that there are brain structures that exist in all of us, and some of us tap into them more easily than others.

Scientists sometimes state the "obvious", and to the masses it seems like we are dealing in minutiae or the completely obvious. But from fantastically simple realizations, often come colossal discoveries. Take the simple historical example of the discovery that the speed of light is constant in all reference frames. The consequences of that simple statement are no less than astonishing.

Most of us don't 'tap' into anything different but do things the same way we have always done them.

if we are successful then we start threads about it

finding "correlates" is the key to success in trading? what is that, define it?

 

[nitro]

Perhaps. Imo what you describe is more a mindset than a brain function. One is nature, the other is nurture.

One is, "I need to get paid everyday." The other is, "I see a trend that others don't see."

Quote from trendlover:

You said in original post that you think great traders have superior brain function of sensory input, and this give a superior prediction, yes? After that you say you do not think the brain of good traders have input for risk of tail risk.
What I ask to you nitro is maybe the traders who take profit early (not always small profit) is a brain function happening of tail risk. So ok, like you say, if a trader always take a small profit and small loss he will not make any big money. But if a trader have good predictive sensory, he will see a trend, take the bet, add to winners, BUT, also take his profit (not always small) and keep his winning, because he have a sensory for tail risk.
That is compared to Neiderhoffer who has good sensory prediction, but maybe overconfident when he has a good bet, and becomes blind to risk of tail risk..then blows up.
So who makes more money of the big picture? The one who takes money off (realized gain) and plays again with only a part of the winning money, or the one who makes huge money, but then loses it all in a blow up?
I am not sure, but it is interesting question. So maybe the trader who takes a good profit early is using intuition/risk sensing part of the brain?

 

[trendlover]

Quote from nitro:

Perhaps. Imo what you describe is more a mindset than a brain function. One is nature, the other is nurture.

One is, "I need to get paid everyday." The other is, "I see a trend that others don't see."

I see what you are saying. Your are saying it is fear to lose money, not a brain function of possible fat tail?

 

[nitro]

Quote from trendlover:

I see what you are saying. Your are saying it is fear to lose money, not a brain function of possible fat tail?

Fear is an emotional response. It occurs in the lymbic system. In the hands of an experienced trader it is a powerful asset. In the hands of an amateur, it causes premature profit taking and stop losses.

 

[trendlover]

Quote from nitro:

Fear is an emotional response. It occurs in the lymbic system. In the hands of an experienced trader it is a powerful asset. In the hands of an amateur, it causes premature profit taking and stop losses.

Some fear is good. It tells a person that they need more information, to stop, they do not understand something. Fear is emotion when you know you do not know the answer. If a person trusts something or someone, then the fear is gone.