Daniel Kahneman talks about his new book in an interview with Charlie Rose. He states that traders cannot use data to predict the market, but baseball teams can?
I can sum up Kahneman's Ted talk in three words, humans are stupid.
As traders I think we can equate the experiencing self and the remembering self with our definition of recency bias. As Kahneman notes with the colonoscopy example our memory of the unpleasantness is based on the severity of the final seconds of the experience only.
This brain we all suffer with causes us to do strange things in life. In the trading pits it causes us to lose money. Lose money because we cannot get past the immense weight we place on the results of the last trade.
Yes, the last trade, one trade.
Our last experience demotes the other experiences in our memory. We then use this, now very faulty memory, to make decisions going forward.
Imagine (let's be honest none of us have to imagine) the destruction of wealth our decisions have caused based on the last trade. Changing the plan, changing the product, changing the time frame, and on and on.
We may think we have a plan, a system, so we are system traders, quants if you wish. We think that, but every time we change the system based on a ridiculous sample size we quite rapidly turn our system trading into discretionary trading.
Discretionary trading is charity work. You just give it all away.
We can't trust ourselves to make rational decisions because we are not rational.
We know we have to put systems in place to save us from ourselves. We know we have to keep trade statistics to reference in place of our faulty remembering self.
We know all this, but the question is, will we leave these systems in place long enough to allow the experiences to form a rational memory?