Mar

26

This "Bubbles" study was posted some time back. It is difficult to know if it is predictive in the current climate.

In the past housing 'busts' have had longer lasting and more extensive GDP effects than stock market busts. To qualify as a bust the housing market has to lose more than 14% of its peak 'boom' value. So I understand that the US is now there.

From Laurence Glazier:

I am sure that the human spirit will drive the market ever forward, along with the entropic force that requires participants to have at least a minimum incentive. But the use of what seems to the uninitiated (like me), like complex credit derivatives, along with wide acceptance of multiple mortgages, leads me to images of bubbles and pins (quite apart from finely balanced domino structures).

One hopes to learn more and be reassured.

 

Mar

22

Looking at stocks since 2003 brought to mind a stone skimming across water. I see five major bounces on the inclined lake.

The world record for stone skimming is an amazing 38. Speed and spin are both important.

Mar

18

In explaining the theory of Steinitz, Lasker tells us that the strength of an attack must be in proportion to the amount of advantage held at a particular time. A player can be 'right' about who holds the advantage in a chess position, but they will lose anyway if they gauge the extent of their advantage poorly.

How should someone gauge his or her advantage? Lev Alburt proposed the idea that advantages could be stated in terms of expected results between equal opponents, and thus a 55% position would mean that White should slightly outscore his opponent (e.g., 5.5 points from 10 games). But if someone thinks his advantage is much bigger (e.g., 85%) he'll probably lose to someone who is essentially 'wrong' on the judgment but who is closer to the correct proportion (e.g., 50% or 45%). The point is that a large overestimation will lead to someone over committing to the attack and paying too little regard for the weak underbelly of his position.


The applicability to trading is very clear, but usually these issues seem to be dealt with as just a binary signal (e.g., 'bullish', 'bearish', 'entry,' or 'exit') and with money management being approached as a separate issue, again with rather artificial discrete inputs (what is the maximum adverse excursion, what can I risk, where's my entry/exit, etc.).

It strikes me that a more proportional approach is much better, e.g., committing or reducing forces according to the amount of advantage. But how should one model such an approach and test it statistically? The problem would seem to be that highly variable commitment dramatically increases the complexity of any test.

Alan Millhone writes:

Excellent article. Tom Wiswell used to say, "Position bests possession." Two weekends ago I entered the yearly Lebanon, Tennessee Checker Tournament. The tourney had around 60 entrants and 23 in the Masters. In my last round I played Dr. Robert Shuffett, author of three excellent checker books. We drew an opening that became the 'White Doctor' and with reds I went down a piece early into the game. Despite being a piece short, I had a death grip on his pieces which were held on his double corner side of the board. I had to maintain carefully that grip to keep any kind of edge or else he would have traded pieces with me and then being a piece up on me would have won the game through attrition.

The market holds simililarities to a checker game, as one is always conjuring ways to keep ahead of the game and the market and to have more winners than losers at the end of the day. At the Tennessee Tournament we played eight rounds of two games each. World 3-Move Champion Alexander Moiseyev was there and won eight out of eight rounds. A truly remarkable feat to accomplish against veteran Masters. To be able to 'win' every trade would be also a remarkable feat of accomplishment and you would thus become a sought-after advisor to the multitudes of traders as Grand Master Mosieyev is to checker players.

Stefan Jovanovich adds:

I had a chance to ask Gil Hodges some questions once after the Mets had finished winning a game. The first question was whether he thought that a well-hit ball would be a hit 50% of the time (this was and has been the prime number of baseball statistics: a perfect hitter will have a .500 batting average). Hodges said that the number was about right but it was probably slightly less than it had been when he was a player because fielders had much better gloves and greater range than they had in the "good old days." He smiled when he said that.

Did he think that there was such a thing as "clutch?" Yes, but it was not that certain players got better in pressure situations, rather that they did not get worse. If the pitcher threw them a hanging slider they would hit it out of the park in October just they way they did in April. "Clutch" for a pitcher was the ability to throw good pitches behind in the count. Whitey Ford was the definition of clutch. Hodges said it took "us" (meaning the Brooklyn Dodgers) three World Series to figure out that Ford would deliberately fall behind in the count. "We thought that gave us an advantage but what it really did was get us to over-swing against the 2-0 or 3-1 curve ball and hit another weak grounder to a corner infielder."

At its best baseball is chess with spitting and cleats.

Mar

14

I have written before about meaningless statements in finance, like "overdue correction." This sort of thing is not unique to finance, however.

Someone flipped his Mustang over the median and ran into a truck in Oklahoma City today. I am watching the news right now. The police say "speed was a contributing factor." Well, isn't speed a contributing factor in every automobile accident? How does one car hit another if speed is not a contributing factor? I suppose that if a car were parked precariously on the wall of a parking garage and the wind blew it off and it fell on to a car below that speed would not be a contributing factor, but that's about the only example I can think of.

What they mean, of course, is that excessive speed was likely what caused the accident, i.e., the idiot was doing 100mph around a turn and lost control. But if so, why not just say that?

It reminds me of the two years I spent on a federal grand jury (one or two days per month). A DEA agent was before the grand jury telling us about a drug bust, and he emphasized that the suspect had a "saleable amount" of cocaine.

I asked him what a saleable amount was. He said "He had X grams, and that is enough to sell." I said "But isn't any amount of cocaine a saleable amount?" He said "Well, he had X grams."

I said, "I understand, it's just that you didn't say that he had 'an amount' of cocaine. You said he had a saleable amount. I am trying to determine what the cutoff is for a saleable amount. If he had the tiniest amount on the eraser on a pencil, would that be a saleable amount"

He said, "Well, yes, you can sell any amount of cocaine."

And I said, "Well, that is my point, the phrase 'saleable amount' has no meaning, and you just use it for effect."

He started to say something, and then the Assistant US Attorney stepped in and stopped my line of questioning. Something also happened when I questioned the definition of "packaged for sale" when it comes to drugs. In short, unless it is scattered on the floor, it is packaged for sale.

Craig Mee replies:

I recently drove with my father. He has much driving experience, though he hadn't been on a highway for quite some time. With me in the passenger seat, he was tailgating cars at 100kph, not something he has normally done. The perception of distance and safety for him has obviously been impaired, as has sensing trouble with cars braking in front of him.

The relationship to the market is this: Having a good understanding of trading and knowing what needs to be achieved may be fine. But diminishing perceptions and feel for the market may interfere with results over time and might lead to a major disaster if not detected early.

My father also recently mentioned to me that life and death situations which he narrowly avoided in his youth, and did not think too much about at the time, had recently come back to haunt him in the shape of dreams and waking up in cold sweats.

Being on guard and aware of changes taking place is paramount.

Nigel Davies adds:

Consider how someone knows he's driving too fast. Speed tolerance varies greatly from one person to another. For me it's when I feel tired after the journey because of the stress. My body's telling me I wasn't fully in control. Of course, here in the UK there are so many speed cameras now that it is difficult to get so stressed without losing one's license.

Can this be applied to markets? Are constant feelings of market-related stress due to "lack of control" an important message from our bodies? 

Sam Humbert notes:

From After the Race, in James Joyce's 1914 collection Dubliners: 

The car ran on merrily with its cargo of hilarious youth. The two cousins sat on the front seat, Jimmy and his Hungarian friend sat behind. Decidedly Villona was in excellent spirits, he kept up a deep bass hum of melody for miles of the road. The Frenchmen flung their laughter and light words over their shoulders and often Jimmy had to strain forward to catch the quick phrase. This was not altogether pleasant for him as he had nearly always to make a deft guess at the meaning and shout back a suitable answer in the teeth of a high wind. Besides, Villona's humming would confuse anybody: the noise of the car, too.

Rapid motion through space elates one; so does notoriety; so does the possession of money.

Mar

11

One of the reasons humans are still competitive with computers in chess is that we are aware of patterns that don't compute. Take, for example, nature of pawn structure. One can count individual pawn weaknesses but it's very hard to find an algorithm by which the harmony between pieces and pawns can be assessed. The human mind, however, is quite capable of this.

Might it not be the same with markets, that there are patterns which can't be effectively coded and others which can? As a very simple exercise one might try to count the number of waves that tend to accompany a decline from highs or see whether an n or u formation is being created. Seems to me that it's very, very difficult to do this with numbers; but the human eye is reasonably adept.

The problem of course is that without a clear computable definition of what one is looking for there will be too much that is open to "interpretation," so the results could hardly be relied up. So what is the solution?

I've been thinking about a possible way round this but please excuse me if it is scientifically unsound. What about having generic patterns that contain multiple computable definitions? For example one might have major categories like "panic" or "breakout," but then multiple and detailed definitions of what these are, just to be sure that the computer will recognize them but not for something else. Then when it comes to the stats the generic categories are tested rather than the details.

Just a thought.

Vincent Andres adds:

Another example: it's very easy and fast for a human eye to detect if points are aligned; it's quite a long calculus for a computer.

"So what is the solution?"

This is a deep question. One answer is to stop reasoning/computing with "crisp" sets. With crisp boundaries you have indeed threshold effects that make the reasoning/computing discontinuous and unstable. One way of doing that is using "fuzzy" sets. With fuzzy sets, set limits are no more crisp, but continuous. So working on them is more stable and more continuous. Nice applications are for instance in control.

Fuzzy sets are an interesting tool when it comes to trying to represent knowledge and work with it.

It's not a miraculous tool. Yes it is (or was) a buzzword. You can do the best and the worse with it. And it was done and it is done. Like with neural nets, genetic algorithms, etc, etc. Like with statistics, probability theory, etc. But it's a nice (and very mathematical) topic.

From Steve Leslie:

I like your analogy to visual patterns that don't compute. There are similar parallels in poker.

A computer can give exact statistics of making a hand and pot odds, etc. It can also calculate tendencies with a player. However poker is a game of imperfect information therefore much is subject to interpretation.

Now then:

Crandall Addington is one of the great poker players of all time and a true character. I saw him on TV 25 years ago playing in the old World Series of Poker with a $10,000 buy in. This was when no limit hold-em was essentially an obscure game and $10,000 was a lot of money. He was wearing a Mink Stetson. This was before PETA for sure.

He said that limit poker is a science but no-limit poker is an art.

Limit or structured poker contrary to popular belief contains little bluffing. Most of the hands are played straightforward. There are many multi-way pots and almost all hands go to a showdown.

No-limit hold-em is entirely different. Statistics and straightforward play will only take you so far. It is much more a game of playing the table and the opponents. A feel for the game, understanding its ebb and flow, and evaluating the dynamics of the players are critical. The best no limit poker players know when to be tight, when to turn aggressive, when to bluff, and when to truly gamble. This is where experience is essential.

Similarities occur in trading stocks and futures.

There are the fundamentalists. People like the Buffett of 20 years ago, who was a protégé of Benjamin Graham. Martin Whitman and others. They can be the value players and the grinders. They see big picture things and exploit opportunities but only when the balances are tilted in their favor.

There are certainly the quants, people like Mr. Symonds who obviously have a created a superior mousetrap. But of course, they are neither talking nor sharing what they have found to be successful. There are some others such as D.E.Shaw. Once again they are extremely secretive and are constantly working on their algorithms that identify patterns. Many of the employees are PhD's in computer sciences, mathematics, and music. They are the equivalent of the Rand Institute. Guys and gals who sit in seclusion and are constantly perfecting their own "black box."

Then there are those who trade on a combination of statistics and feel. They tend to be excellent at the "feel of the game" and reading the opponents. The Chair is one of the best of these. One of the finest traders in the world who worked for one of the great traders in Soros. Robert Prechter has had significant success trading off of Elliot Wave patterns.

Then there are the floor traders. They are very intuitive and great readers of the market. They get the first look at where the orders are being placed and who is placing them. In Education of a Speculator, Victor describes in detail how one of Soros's traders would enter the elevator to the floor and the bids would change. It became a game of the cat and the mouse.

In summary: There are opportunities for each of these to profit from the market. As each of the above have demonstrated in their abilities to make money time and time again. It then boils down to what kind of game are you are in and an understanding the rules.

From Bill Egan:

Plotting the data different ways pays off all the time. I earned a US patent because I examined bi-plots of ~50 variables and saw something interesting. Further investigation showed a sensible relationship to the physical mechanism I was interested in modeling, and I quickly built a model that has worked for eight years now.

I always use bi-plots. Once I have a feel for the data and can throw out some variables, I will color points in bi-plots by a third variable. I use this to highlight known extreme values, events, or odd experimental results. It often reveals useful patterns to the careful eye. Histograms of the distribution, data percentiles (percentile function in Matlab), and empirical cdfs are also handy. Multi-modal distributions are often interesting and show up in a histogram.

Software like SpotFire makes this very easy, and includes ways to size and shape data points by other variables (although it isn't cheap to buy). You can certainly do this sort of thing with a bit of work in R or Matlab or S+.

Another trick of the trade is to compute correlations among your variables. You can almost always remove a variable that is r^2 0.9+ with another variable. This will cut down on the amount visualization you need to do.

Further thought from Nigel Davies:

What if the most subtle and powerful engine for pattern recognition and synthesis is in fact the human brain? In this case shouldn't we be training ourselves rather than our computers?

Probably the search for patterns does this anyway but this would seem to be another benefit of the Chair's recommendation to hand count.

Mar

7

I have been considering the way a chess player thinks and the chairman's trip to Florida. I wonder if there might be a major conflict between the way the fish sense danger and the way that market patterns are counted.

For example, it may be good to buy stocks during 'panics,' but how does one define a panic? Three to four days down may or may not be a panic just as an x day low may or may not be one. But as soon as one starts to add conditions, e.g., high volatility, then the number of independent variables will upset the statistically minded.

I know how chess players deal with such issues — they synthesize different factors and 'take a view,' even if the position is a unique sample. So an isolated d-pawn is not necessarily a bad thing, it depends on other factors. Some say that exchanges mean that the pawn will be more of a liability, but this is also not really true. And by the time one has thoroughly assessed the various details, it could turn out that the outcome depends on a player's king position. If it were on g7 he'd be fine, but with it on h7 he has great difficulties, simply because of a check in a particular variation.

In competitive chess this has serious implications. One of the ways to win games is to lead people to believing they have a good position when in fact there is a small but important change to the standard scenarios. So when we got four days down on Feb 26th, one needn't have looked further than Altucher's Trade Like A Hedge Fund to see how advantageous this is. But we all know how the next day turned out.


Of course knowing precedent and systemizing advantages is a valid method in chess, and one can see this very clearly in the games of Max Euwe for example. But the very strengths of this methodology would also seem to contain a serious weakness, the unique position that defies the usual means of assessment. And this was very much in evidence in the second Alekhine - Euwe match in 1937 in which Alekhine deliberately targeted Euwe's approach by finding positions with a sample of one.

Now markets wouldn't deliberately do such a thing, or would they? What if the increasing number of quant traders were to produce an adaptation in markets, just as a virus might adapt to antibiotics? Wouldn't there be increasing chaos, with traditional patterns breaking down?

Feb

20

Just got my copy of this newly published book and feel waves of sadness as I read David's conversational prose. I get several mentions, for example on page 31:

"From Bergen I flew to Oslo, to an international open tournament. I was met there by grandmaster Nigel Davies, whose acquaintance I had made back in 1988 in Protvino, a small town not far from Moscow. At that time we talked a great deal, and I expressed plainly everything that I thought about modern chess. And it was pleasant for me when, after producing a small flask of Scotch, Nigel said: 'David, I have been thinking a lot about your ideas and I see now that you were right!'. We drank to this, regretting only that it was just a small amount… Now I regret something else. Until recently Davies was the chess consultant for Batsford and I think that he could easily have persuaded the owners of the publishing house to publish my new book. But who now will say a word on my behalf?"

I can only say that I never knew that David had another book in preparation; the secret notes really were quite secret. And given my early dissatisfaction with Batsford in its various incarnations (before bankruptcy and afterwards, and I quit them twice) I would have advised that he find a publisher that would have done his work more justice. In the end he found an excellent one in Olms.

Feb

20

On a television channel dedicated to religious topics, a clip of Daily Spec contributor Larry Williams appeared within a segment on Bible Codes. Larry, a journalism graduate, dug up information about Moses and wrote a whole book on the material he found. I was surprised to learn of Larry in this context, since he is best known for other marvelous achievements.

The Bible, according to cryptographers, is replete with predictions written centuries ago and found to be accurate by the events unfolding in our time.

Kudos to Larry for investing his time and expertise, his flair for language, in this remarkable project.

Nigel Davies writes:

This is highly analogous to searching for Codes within the markets, with many of the same problems applying. I understand that one of the bones of contention is the asking of the questions and that sceptics have found apparently similar Codes in Moby Dick and elsewhere.

One of my acquaintances ended up becoming ultra-religious on the strength of Bible Codes. I guess he might have wanted them to be there or he'd have tried to falsify them before donning the black hat.

Such proof would also contradict one of the major philosophical ideas of Judeo-Christianity in that any 'struggle with G-d' would essentially be over once 'proof' were discovered. I guess they figured it was more important to get bums on seats.

Adi Schnytzer replies:

There have been (unsuccessful) attempts by statisticians (but what would they know, right?) to refute the Codes, but I don't want to spoil Nigel's day with facts. If he really cared about this beyond heaping contumely on it, a little Googling would go a long way. 

Gordon Haave responds:

Please! Let's not get into fantasy. Numerous statisticians have shown what a fraud the Bible Code is. But, even if you want to go back and forth between competing websites, all you need to know is that there have been no "predictions" at all. After certain things happen, the Bible Coders go back and data-mine the bible to see if the event was predicted. When they predict something unlikely in advance (not a vague "there will be trouble between Israel and Palestine") then get back to me. 

Adi Schnytzer retorts:

Well, I guess I'm going to have to blind you with facts! The paper that studied the Codes was written by Doron Witztum, Eliyahu Rips, and Yoav Rosenberg and is entitled Equidistant Letter Sequences in the Book of Genesis. It was published in the very respectable journal Statistical Science in 1994. An attempted rebuttal was published by Brendan McKay, Dror Bar-Natan, Maya Bar-Hillel, and Gil Kalai in 1999. See Ralph Greenberg's site for links. For myself, this will do:

"The present work, represents serious research carried out by serious investigators. Since the interpretation of the phenomenon in question is enigmatic and controversial, one may want to demand a level of statistical significance beyond what would he demanded for more routine conclusions… The results obtained are sufficiently striking to deserve a wider audience and to encourage further study."

H. Furstenberg, the Hebrew University
I. Piatetski-Shapiro, Yale University
D. Kazhdan, Harvard University
J. Bernstein, Harvard University"

Laurent Glazier remarks:

I am not sure what this particular example might mean, but because a Canadian academic has succeeded in finding similar patterns in the text of Moby Dick it has been widely assumed that this invalidates all Bible Code findings. Similarly the artificial construction of small scale crop circles in England has led people to conclude that all such formations, including those on a huge scale, are artificial. These conclusions are appealing, and may be true, but are not logical.

The Bible Code discovery I found most intruiging was that the encoded occurrences of the Hebrew names for tree species are nearly all found hidden in the verses describing the Garden of Eden. Designing statistical tests to prove the likelihood or otherwise of such patterns, found in context, has caused great difficulty in the past to fine minds, largely because preconceptions can interfere in setting up the tests.

Testing for geometric patterns in star formations is another matter, especially Mark Vidler's unpublished discovery of the clustering of bright stars at multiples of 10 degrees from Regulas, as seen from Earth. Another issue entirely would be looking for a cause of any established patterns.

Kim Zussman adds:

The movie "Pi" (3.14159…) is about a mathematician who suffers from severe migraine and mental illness, and is deciphering hidden numerical codes like Fibonacci series in The Kabbalah. He is pursued by a rabbi who is also a mathematician.

G-d's commandment is to index: shouldering the risk of capitalism while not attempting to gamble or covet other people's wives is written in the WSJ between the mutual fund quotes.

Feb

13

Some time back I mentioned the book Gm-Ram: Essential Grandmaster Chess Knowledge , by Rashid Ziyatdinov, and ordered a copy for review. It is a chess book with little text, no notes to the games and no solutions to the 256 positions…

Alan Millhone writes:

But few of us are in that 'elite' category that we need neither instruction nor guidance. As an average checker player I look for books that are well annotated and full of diagrams and solutions towards the back of the book.

Every checker book in my library would be the opposite of his book on chess. The late English Grand Master Derek Oldbury once wrote a book called Move Over, but it is written in non-checker notation and most difficult to follow. Our current 3-Move World Checker Champion recently wrote a book he calls Sixth, and it is well annotated and full of diagrams. It is as if Alex is talking to you in the first person all the way through … Ah, my kind of book.

Nigel Davies adds:

Yes, but the problem is that your understanding will tend to be 'second hand' rather than unique and cutting edge. My best results always came after individual creative work where I went my own way. I might end up agreeing via a roundabout route, but my agreement would carry much greater depth.

Alan Millhone replies:

But keep something in mind: I am just an average tournament checker player. The skill levels of someone like Alexander Mosieyev or Suki King of Barbados, and myself, are miles apart. Perhaps someday I can hammer out my own individual lines of play. Most top players study the greats in our game then try to improve on those tried-and-true lines of defense and attack. I am not at that level yet, may never be, but I love to compete!

Nigel Davies writes:

But what comes first, the chicken or the egg? Do you not try to forge your own lines because you are an average tournament player, or are you average because you are not doing this work?

I believe that one of the major problems 'late improvers' face is in changing their attitudes and habits. Teenagers are notoriously disrespectful, and this allows them to challenge everything. So those who were full-timers as teenagers developed the habit to challenge, whilst hobby players developed the habit to accept.

I think it's good to find just one thing at which you can be the best, but being the best necessarily involves refutation of the old.

Feb

13

Cuddly rats seem to be on offer in Ikea right now. I got a junior one for just GBP 1.99, rats probably being heavily discounted because they weren't selling well. Here in the West we think of them as plague carriers and vermin, but in China rats are considered to be enterprising and courageous little fellows. I shouldn't include all Westerners. Gunter Grass wrote a novel entitled The Rat, written from the rat's perspective.

I believe there are many good lessons here. There is a lesson in prejudice, the rat being hated despite its good qualities, whilst lazy koalas are loved despite sleeping 23 hours a day (apologies to all koalas and their federations if I have this figure wrong). Once rats are recognized as being lovable, more people will jump on the bandwagon. Woes betide anyone who castigates them as lazy, useless bastards.

There is a lesson in value, my immediate thought being to buy a shipment of rats from Ikea and sell them to China in exchange for some cuddly koalas. If I get four koalas for each rat and sell the koalas at four times what I got the rats for, that's a 16x profit potential, excluding costs.

There's also a lesson in objectivity. Why should it be that koalas are so highly valued? Nobody speaks admiringly of your child's rat, and I can speak with authority on the matter having road tested the situation in town this morning. You may hear people say "What a cute koala," but the words "What a cute rat" never seem to occur to them. There were a few wry smiles and one "Is that a rat?"

Last but not least there seems to be a lesson in speculation. Where do people's sympathies lie and do these really make sense? It seems to me that this is the essence of trading, buy the rat and sell the koala.

Feb

11

Having returned home from visiting Chessbase in Hamburg yesterday, and having the privilege of being associated with two other successful businesses (Gambit, the World leader in chess book publication plus the Chair's shop), I noticed some similarities that I thought might be worth sharing. Whilst they are reminiscent of one of Jack Aubrey's commands, how many other businesses are there like these, and can it be formulated into an investment strategy? I imagine there are a few software producers and small biotech companies which share these characteristics, but how does one find them for investment purposes?

·    Everyone gets on with his job.
·    Whilst there are outstanding specialists in
particular fields, there is a certain degree of interchangability between roles.
·    There's an absense of office politics and little or no authoritarianism.
·    Nobody is counting the hours worked and several people work from home ('Gambit' is entirely virtual).
·    The atmosphere is distinctly low key.
 

Feb

3

Hubris Threatens Every Leader and Business

In fact, hubris is man's cardinal sin. Consider how the hubris of leaders of state has shaped defining events of past centuries. In 1764 and 1765, British Prime Minister George Grenville overestimated his ability to tax the American colonies, and underestimated the potential for the Americans to revolt, which led to the American Revolution. In 1812, Emperor Napoleon Bonaparte's false confidence in his ability to conquer the Russian heartland led to France's disastrous Russian invasion. And, in 1939, Adolf Hitler had Germany invade Poland.

We're all too aware of how CEO hubris is stamped on business failures, from Parmalat, Swissair, and Vivendi in Europe, to Enron and WorldCom in the United States, to the National Kidney Foundation in Singapore. Very often hubris is the handiwork of egotistical and reckless leaders of business and state. We hear about the downfall of these individuals on almost a daily basis, and you probably have no trouble conjuring your favorite example of an executive whose excessive ego and stubborn pride has resulted in financial and professional disaster.

For now, put that person out of your mind. Because he or she will distract you from the more present and pressing reality: Hubris is so deeply ingrained in our culture that it is a latent force within each of us, whether we are leaders or not. See hubris in the losses that we investors take as we overestimate our ability to make winning deals and trades. Watch hubris in the damage that we do to our health by trying to "play doctor" by diagnosing our own illnesses, and when real doctors join forces with pharmaceutical companies in overestimating the benefits of their treatments. Listen to the hubris of rookie executives who exaggerate how far their inflated grades will carry them — and our business. Many people take false comfort from being 'very confident' that they can retire comfortably even when their actual savings are inadequate.

Hubris helps to explain why leaders make decisions that are bound to fail. Most conspicuously, mergers and acquisitions are at near-record levels, even though seasoned CEOs know that most of those deals fail. Joe Roth, who has run movie production at 20th Century Fox, Disney, and Revolution Studios, notes that movie houses release a disproportionate number of movies in May, especially around Memorial Day in the United States, even though their executives know that there are not enough moviegoers to support that many simultaneous film releases. Leaders who make these deals believe that they are the exceptions who will beat the odds of failure when, on balance, logic dictates that they cannot.

Hubris originates with our need to be highly confident and our propensity for turning that confidence into overconfidence. So long as crystal balls remain elusive, we're going to be wrong on some judgments that matter most, including those that involve at least some leap of faith and trust, such as taking a job, choosing a partner, or investing in a major project. And, if we are going to be wrong by being underconfident or overconfident, we should err on the side of overconfidence — we must be highly confident to win in business and life, even if that makes us more susceptible to overconfidence. Overconfidence is not uncommon nor need it be damaging. We can act with the best intentions and data and still overestimate next year's sales, our promotion and pay prospects, or the returns from our ventures, projects, and investments. The optimism bred by such overestimation can help spur us on to achieve more than we otherwise might have done. Overconfidence, as an integral part of the discovery process, is also instrumental to scientific and economic progress. Picture, for instance, Thomas Edison testing over 10,000 combinations of materials before perfecting the light bulb. Throughout the testing process, Edison remained supremely confident, believing a breakthrough would come earlier than it did. "I have not failed," he said at the time; "I've just found 10,000 ways that won't work." 

The Four Sources of Hubris

In fact, when extraordinary confidence is grounded in the best available data, it is authentic, and a positive force for advancement. It is when our confidence is false, when we are confident for the wrong reasons, that two serious problems arise. First, we are more susceptible to being overconfident than if our confidence were authentic. Second, such overconfidence is more likely to translate into actions and decisions that will damage us and others. Hubris refers to the damaging consequences that arise from the decisions and actions that reflect false confidence and the resulting overconfidence. Having conducted scores of studies and interviews, I have determined that there are four sources of false confidence:

1. Being too full of ourselves. Excessive pride leads to a contrived view of whom we are and an inflated view of our achievements and capabilities, one which often depends on external approval and validation.

2. Getting our own way. Our pride can lead us to tackle single-handedly decisions or actions that could be better addressed by or in conjunction with trusted advisors, or what I call "foils."

3. Kidding ourselves about our situation. We indulge in overconfidence when we fail to see, seek, share, and use full and balanced feedback to gain a more grounded assessment of our situation. We need accurate, pertinent, timely, and clear feedback, whether positive or negative, to ground our knowledge about what's going on around us.

4. Bravely managing tomorrow today. Because we may not know whether we're acting with unhealthful confidence, we need to manage the consequences of our decisions ahead of time. To be courageous is to consider fully the risks and consequences of making and implementing decisions, and then to proceed mindfully. To be brave, however, is to jump in heedlessly, without adequately considering the risks and consequences that will result from your decisions and actions.

Experimenting and probing allow us to see courageously and first hand the consequences of our decisions. By contrast, planning often makes us more confident and brave without increasing our ability to get the job done. False confidence is to hubris what bad cholesterol is to heart disease. Just as the cure for heart disease is to reduce bad cholesterol rather than all cholesterol, the cure for hubris is to fight the sources of false confidence, rather than to reduce confidence altogether.

A fundamental and unheralded challenge for any executive and leader, therefore, is to identify and manage such sources. It is a matter that I've examined as an executive and researcher over the last 20 years, from the time when I first felt and saw hubris as a young investment banker. Based on this research, I have written Ego-Check: Why Executive Hubris Is Wrecking Careers and Companies-And How to Avoid the Trap, to help you learn how to remain highly confident — both personally and professionally — without falling victim to the false confidence that produces overconfident decisions and actions that fuel hubris. This article encapsulates the leadership implications of this research. Please visit me at ego-check.com.

To follow up, a comment from Vic:

I have read the book Ego-Check and find it valuable for all traders. It gives poignant case studies of those who suceeded often for a time, and then failed. It analyzes the main reasons these people failed and provides a checklist of how to prevent it from happening in the future. It is based on his own interviews with business leaders and researchers in the field. In my case, I have implemented a series of planning for the future now, feedback loops, and hallmarks of hubris that hopefully will prevent me from succombing too much again.The subject is particuarly resonant because my father did much scholarly work in the field and I didn't pay enough attention to it in the past — until now. Vic

Nigel Davies adds: 

I wonder if much of what is recognized and diagnosed as 'hubris' might not be explained in other ways. For example:

a) The 'hubristic' act was not much different to previous risks, it's just that the 'hubristee's' luck finally ran out.

b) Too much success in one area caused one particular well to run dry, forcing the 'hubristee' to seek other fields. I think this might be applicable to Steve Irwin. The public (and his producers) just had enough of crocs, so he was forced to seek other fields to maintain his lifestyle.

c) If the 'hubristee' has opponents who can influence the dynamics of the game, perhaps it's a question of time before they adjust to his 'style.' This has been true of a lot of risk taking chess players, for example, Tal once noted something to the effect that his opponents started protecting e6 and f7 very securely. Kramnik similarly discovered that a good way to play against Kasparov was to exchange queens and play equal or inferior endgames against him. And once he'd won, everyone started to notice Kasparov's apparent 'hubris.'

Stefan Jovanovich offers: 

Hitler's invasion of Poland was hardly an act of hubris. At the time, to most Americans and many Europeans, including a plurality of the British and French public, it seemed an arguably justifiable act by Germany to reestablish its 1914 eastern border. To the German public, it was wildly popular, not as an act of aggression but as the rectification of the last remaining crime of Versailles. Elite public opinion in all "Western" countries was far more upset at the Soviet's unprovoked attacks on Latvia, Lithuania and Estonia; those seemed completely unjustified. After all, the Germans had only asked that the Danzig corridor be removed and that East Prussia be reunited with the rest of Germany. If the Poles had not been so stubborn in their refusals, the war need not have happened at all. The difficulties over Czechoslovakia and Austria had been resolved without bloodshed. Why were the Poles being so difficult?

It does not fit Mathew Hayward's construct, but in 1939 Neville Chamberlain was considered to be the European statesman who was acting out of hubris. How could he presume to drag Britain and France into a war with Germany solely because the British had given their word to the Poles that they would defend them? The Poles, for God sake! If that were not bad enough, Chamberlain was committing the Empire to a one-front war. Hitler had avoided the mistake of 1914; his invasion of Poland had led to a Pact with Stalin that secured Germany's Eastern front and guaranteed a reliable supply of oil and grain. As I have noted before, Chamberlain is the poster boy for "appeasement" in the "kill 'em all - tough guys always win" comic book that passes for military-political history these days. (That seems to be the same tome that some list members are reading from when they join the T-shirt sellers on Telegraph Avenue in describing the current situation in America as "Fascism.")

Chamberlain's real crime is that he was "guilty" of recognizing how weak Britain's position was and how limited its options were. Instead of being its allies in this conflict, Italy and Japan would be Britain's enemies; and the Soviet Union would, at best, be neutral. Given their incredible sacrifices of the First World War, the French could not be expected to match their efforts of 1914-1918. In 1938, the British public remained as isolationist as the Americans were. In describing Czechoslovakia as a "far off land," Chamberlain was offering the compromise position between Churchill's bellicosity and the Left in Britain, questioning why even France should be an ally. Chamberlain knew that, without American help, Britain and France could at best hope to stalemate Germany. He also knew that the French would not go to war over the Sudetenland, but they would accept Poland as a casus belli. In measuring his statesmanship against Churchill's, it is useful to remember that Chamberlain, not Churchill, was the Prime Minister who committed Britain to rearmament in the years before Munich. Hayward should have used Churchill instead of Hitler if he wanted an example of CEO arrogance. When the Russo-Finnish War began, Churchill's recommendation to the Cabinet was that the RAF bomb Moscow! That would have been hubris.

Stefan Jovanovich continues:

Hitler's invasion of Poland was hardly an act of hubris. At the time, to most Americans, many Europeans, and a plurality of the British and French public, it seemed a justifiable act by Germany to reestablish its 1914 eastern border. To the German public it was wildly popular, not as an act of aggression but as the rectification of the last remaining crime of Versailles. Elite public opinion in all "Western" countries was far more upset at the Soviet's unprovoked attacks on Latvia, Lithuania and Estonia; those seemed completely unjustified.

Feb

3

I have been thinking about kids' games. The purpose of these games is to prepare them for a productive and happy life. The game they seem to play first is one where they take something out of a bag and put it back in. I wonder how many market situations are like this in which the game prepares you. The gap to a new level is one. The refusal to go up a certain large amount is another. The inability of a market to be number one is another. Other situations include when the price hasn't been fulfilled, and when the stop hasn't been hit. I will attempt to quantify this and other lessons that we can learn from kids, and would appreciate your help and suggestions.

Mark Goulston comments:

While you're on the subject of kids' games, you might want to check out zoooos here. It's an educational interactive toy/device that three year olds can use to interface with educational DVD's rather than plopping in front of a tv.

J.T. Holley offers:

I have been thinking about kids' games. The purpose of these games is to prepare them for a productive and happy life.

When my three kids were each around one or two, my favorite activity was to play the interaction/game Peekaboo. That purpose, it seems, is to spawn and draw out those beautiful smiles and giggles in that specific stage of development. But it also could very well be the initial training of anticipation for earnings announcements, IPO's, government figures, AP headlines, CNBC guests talking, and spin offs. We all know what's coming within a half a deviation most of the time, but we so easily giggle and get all bent out of shape with enthusiasm and expectation. It's as if the Mistress places her hands over her face knowing that she can make us all giddy and put a smile on our faces. She controls our giggles.

Jeff Sasmor comments:

My younger daughter learned to read whilst playing Role Playing Games (RPGs) where there's a lot of dialogue popped up for everyone to read aloud. Many games are also good for hand/eye control improvement. That said, Grand Theft Auto is NG and other M-rated games are not for kids. Excessive use of games and videos as babysitters is also bad. It's also no good for kids to be so booked up with sports, tutoring, music, et al after school that they don't have any free time and can't have a social life!

But not everyone can afford a nanny and parents need some rest once in a while. What parent hasn't envied the DVD player in the minivan? What parent hasn't plunked down their child in front of the TV to watch Lion King so they could rest? A kid with a Gameboy in the back seat of the car lets you concentrate on the road rather than having to concentrate on the child's needs while driving. A kid reading a book in a car may throw up. And checkers in a car? Well, maybe magnetic checkers …

Many video games teach logic and thought in the same way that chess or checkers do. For example, strategy games where you battle various players against the AI in the game. You move around players and pieces which have various move types and capabilities - and the game tries to knock your players out. These games are very much like chess in spirit.

Both my kids have had an unrestricted diet (but a well selected choice!) of video games and computer use (but no games on school nights so I get a chance to play) and they're intelligent children & excellent students.

Parents have to modulate choices for children, but it's too easy for Grups to blanket-condemn a whole lifestyle and genre because some parents are too lazy to monitor what their kids do. Guidance and monitoring is what's important. Kids deserve to have some fun of a type that they choose. We don't need to control everything down to the last molecule.

Alan Millhone adds:

On our ACF website I always say: Checkers — the mental sport alternative to video games. Children of today are too addicted to video games and TV as babysitters. Children's minds have to be challenged in any way we as parents and grandparents can.

J.T. Holley adds: 

On our ACF website I always say: Checkers — the mental sport alternative to video games. Children of today are too addicted to video games and TV as babysitters. Children's minds have to be challenged in any way we as parents and grandparents can.

OK I'll speak up on this one. Now guys, really, I'm not a spring chicken and I grew up with a Stretch Armstrong, Green Machine, Red Rider, various board games, Cable TV, microwaves, and yes Atari. I also had a Commodore 64 that I won in a raffle from a minor league baseball fund raiser, and I also had my favorite 64 in one electronics kit from Radio Shack. That was only to establish background.

My point is "the ole gray mare ain't what she used to be." I do not, repeat, do not allow my children carte blanche the ability to watch hours and hours of tv, but have ya'll watched what is out there for children these days? I mean in the 70's when I watched tv it was Captain Kangaroo, Electric Company and Sesame Street and all those lingering cartoons from the 50's and the 60's that had smoking, gun shootin', Popeye's tatto's, and fist fights. These days it's Dora teachin' Spanish, Wonderpets dishing out principles, Little Einsteins introducing Classical Music to three year olds, Bear in the Big Blue house teaching four year olds to "Clean up the house," and my favorite on Discovery Kids Prehistoric Planet educating my children about dinosaurs that we were never told about! The bottom line is that it's good stuff and educational in content and delivery as long as you stay away from old man Turners Cartoon Network (junk) and be selective with duration and channel.

Now having said that, tv is no substitute for reading, flipping index cards with numbers and letters, and interacting with your children in the traditional sense. Heck, my little Addie loves reading Dick and Jane.

On the topic of boardgames, I'm an addict and I will say that we've advanced to higher levels as well, as far as education and skills. To once again show my lineage, I grew up with Risk, Stratego, Checkers w/ Grand Daddy Holley, Connect Four, Monopoly, Chutes & Ladders, Pay Day, Perfection, Simon, and Axis and Allies, my favorite game around 16 years old. These board games today made by Cranium are out of this world. If you want to see your children ages three to eight stimulated and become a ball of laughs while learning competition and creativity, then go buy Cranium's Hullabaloo either on DVD or with the Simon-esque plastic voice box. The other that I highly recommend is a newer game called Zingo! It is a mix of Memory and Bingo. Once again, the bottom line is that kids these days have far greater choices and boardgames to play than the classics that we had. If you play enough of these newer boardgames, you'll see that children at an earlier age are picking them up than it seemed before.

I won't even go into Leapad, Leapster, and the other computer stuff that exists out there in the electronics world today. It ain't all Doom, Drive-by Shoot 'em up either!

Yes, myself and my children spend countless hours walking paths identifying trees, birds, rocks and such. We run, bike, hike, and swim too! We also do Tae Kwan Do, Soccer, Golf, Bocce, Badmitton, Croquet, and Kick the Can.

James Sogi offers:

A favorite kid's game is "drop it." My kids would say, Dad pick it up … drop it, Dad pick it up, drop it etc. It's lots of fun.

A favorite market game is market drops. Dad picks it up … market drops, Dad picks it up … lots of fun. It's profitable too.

Nigel Davies adds:

I'd like to put in a word for computer games for kids, which don't necessarily include shooting aliens or others with laser guns etc. You not only get strategy and problem solving in quite realistic scenarios (well kind of realistic!), but also the development of computer and motor skills. The characters can also talk in context. The 'Thomas the Tank Engine' series are especially good, especially 'Thomas Saves the Day.'

Even with board games I think they can be made much more fun if they're on a computer with nice graphic presentations, warnings about illegal moves, ready made opponents etc. You and your child can take the same side against computer generated play, much better than having you beat them or letting them win I think.

My son's a bit young for chess right now but when I do start him off, it will be with Chessmaster, not a strong program but with nice graphics and teaching facilities.

Jan

28

This afternoon, I started teaching Sam about board games, starting with noughts and crosses. What was particularly interesting was the problem of how to play as badly as possible so that Junior would get a taste for winning. I worked out that I should aim for the squares a2, b1, b3 and c2 on the 3×3 matrix, and above all avoid the center square (b2). And these thoughts led me towards what is probably the optimal strategy if one is trying to win, i.e. going for b2 immediately. OK, the game will be a draw, but this maximizes the number of losing possibilities for the opponent. And the same strategy is the best way to play chess, and I'm sure checkers too.

Anyway, this line of reasoning got me wondering whether the best strategies in other games (e.g. chess, checkers and markets) might be worked out by first considering the worst things to do. My top losing strategies for chess and markets are the following:

Chess:

a) Getting into areas one doesn't understand

b) Violating the laws of Steinitz (e.g. trying to 'win' from inferior positions or playing on the wrong side of the board)

c) Burning bridges

Markets:

a) Making commitments based on hearsay

b) Shorting markets with drift

c) Applying too much leverage

Besides the clear analogy between the a's, b's and c's in both lists, what really struck me about this was that weak players violate all of them whereas the best players will only transgress b and c, and this will be to pursue exceptional returns in markets or finishing in the top five or so in a 200 player tournament.

My conclusion from these ruminations is that it's not that hard to play a sound game, but the demands required to play an exceptional game probably increase exponentially the higher one raises the bar. It reminded me of a piece that Rashid Ziatdinov, an interesting and original chess thinker, sent me some years back.

Agzamov's style was to win by making no mistakes; he was determined to make no errors. This puts titanic pressure on opponents. He played similarly to how a computer plays now: no "great plans," but no tactical mistakes. This strategy was successful against many of Agzamov's powerful opponents.

Tal-Agzamov is one of George's best games. Look how the great Tal missed d4! (but not George!). Black won the exchange but not the game. The next step was to force Tal to make another mistake, to make him tired; this sounds dishonorable, but its not, its an honorable stratagem. George repeated the position many times and finally, when the real battle began, Tal made another mistake (Bd5) induced not from time-trouble, but from fatigue.

Alan Millhone adds: 

I knew Marion Tinsley well 30 years ago. He played chess when he began college and switched over to checkers. He will be known as the greatest checker player who ever lived. He played the best move that he knew (always) and was patient to wait until an opportunity arose. When playing 3-Move, he disliked the easy openings and would ask for a draw, hoping to draw a more difficult opening from the ballot of cards. When two equal opponents play checkers, they are supposed to end in a draw. Ron 'Suki' King will play out about any seeking to win. He has a high record for won games because of his pursuit of wins.

I have the book on Chinook and the annotated games Marion played against Chinook. I doubt if he would stand a chance today with the new expanded opening book and end game databases on checker programs. The computer computes too quickly and never gets tired!

I know little of the stock market (will learn a lot from being on the spec list, but I know a lot about losing in checkers. I found out years ago that to play better, you have to play better opponents. I left the game in 1970 and did not return until 1999. In 2000, I entered my fist nationals and played in the majors. From then on, I moved myself into the Masters and continued to play there. I don't have the time necessary to master the openings, so I drift into trouble early at times with those more learned than I am. Now to chess:

a) I readily get into areas I don't know due to my lack of knowledge. Lack of knowledge (research), I am sure, will hurt you in the market as well.

b) Tommie Wiswell admonished to "keep the draw in sight." This, I am sure, applies to the market on knowing when to 'fold' on a particular stock and move on to the next 'trade' (game).

c) To me, burning bridges in a board game is getting too developed (exposed) and then having no 'back up' or way out. In the market, you buy and buy a stock when it is time to unload.

Does your thoughts on Agzamov have anything to do with game theory ? Our World Champion, Alexander Moiseyev, has his own set of 'golden rules' for the game of checkers. His fine book, Sixth, pays homage to how he plays and to his own theories on the game of checkers.

Tinsley played 'safe' until an opportunity presented itself. Those before him like Long, Hellman, and Case also were all safe players until they could secure an 'edge' due to their opponent overplaying their position or simply making a blunder.

Nigel Davies comments:

Thanks for the interesting thoughts. Despite not playing checkers, I can see there are a lot of parallels. I wonder if anyone has attempted a generalized theory of game playing. My debate with the Israeli professor betrayed the fact that I don't think 'game theory' has any relevance to a practical struggle, and those more academically inclined than myself were able to add flesh to the bones of my argument by pointing out the oversimplified assumptions. Lasker wrote an encyclopedia of card games that was very interesting, as is Lasker's Manual of Chess. But I have only seen a copy of the former in Copenhagen's Library - I don't believe it was ever reprinted.

Ziyatdinov is a mathematician as well as a Grand Master strength in chess, and his thoughts will reflect this to a large extent. But as far as I know, they bear no relation to anything devised by game theorists. They are his own and are quite original. He maintains for example that a player should learn some 300 positions perfectly as explained in his book, GM Ram. As a player, he is also highly original, playing old fashioned openings without any particular theoretical knowledge, but showing great practical strength in the later stages. He marches to a different beat.

The area of 'knowledge' and 'understanding' is much more complex than I portrayed with my one-liner. For example, I think that many players, even professionals, find themselves playing without a perfect understanding of what they are doing. There is just so much to every field when you start to get deeply into these things. I have been struggling myself to juggle too many obligations (actually I think my chess has been getting weaker ever since my peak around 1993-97) and have concluded that trying to master more than one field is already way too much for ordinary mortals. So the problem players in unprofitable areas face is how to find the time. Many only get to devote themselves when their minds aren't quite as mentally sharp (not to mention reduced stamina). One of the good things about Communism was that they allowed their game players to maintain amateur status by giving them jobs, but all they had to do was collect their paychecks!

Jan

22

It has been alluded to that during the Tennis Open, when a player is in trouble with injuries, cramps, or dehydration, instead of the opposing player finishing him off (which obviously seems like a great idea) … the match spirals into a seesaw affair. Is this due to the fact that only so many people possess that killer instinct, and people actually feel "sorry" for their opponent? … or does the tempo and hitting of the game change that much that the "fit" opponent loses direction and momentum, and thus finds himself out of sorts?

The parallels to the market, i.e. being able to take advantage of a winning period and putting the foot on the accelerator when able to … or being in a winning position only to observe changes out of left field, effecting normal market cycles, and status quo, are maybe self evident … Do traders go for the kill while maintaining risk parameters when in a good position or has the market mistress blown the minds and the trader's account so that many times before, they are worried where the next serve will land?

O wise humanity, terribly wise humanity! Of thee I sing. How inscrutable is the civilization where men toil and work and worry their hair gray to get a living and forget to play! -Lin Yutang

Victor Niederhoffer comments:

Mr. Mee reminds me of Yvonne Goolagong in that he's such a natural for trading. I only wish I had his ability so that with the hard work I am accustomed to, I could go very far. He writes about the Australian Open and notes that many matches where one side is injured ends up being very close or actually losing to the healthy. Racket sports is the one subject I am truly an expert on so I would like to comment on it. I have often been involved in games where my opponent is injured. One of the National Squash champs of my day had a tendency to faint in the middle of a match, go out cold for half hour and then come back and play much stronger. I knew about this and always redoubled my efforts when the game started, and won because of that. Sports Illustrated had a full page picture memorializing the victory. The market has that same tendency of playing possum, which of course is widespread in the natural world, and is covered in most books on camouflage. Since I'm not an expert I will leave it to one of our naturalists to generalize and model. However, the market of course has encapped this tendency. It frequently pretends to be totally weakened and attenuated. This is a snare and a delusion. The tendency can be quantified in many ways, and were it not for the Minister's ever vigilance, one would do so.

Scott Brooks adds:

In the natural world, it almost always comes down to experience. But before experience can occur, luck comes into play. Here's what I mean.

I have reached a point in hunting where killing a deer is not hard, whereas years ago, it was much more of a challenge. I've written about my first hunting experience and a few experiences thereafter, and the bottom line is that I simply get lucky.

When I'm hunting, I come across game all the time … young inexperienced deer that have never encountered a hunter. Many times, I can tell that they know I'm there … they can just sense something. Since what they sense has never been associated with danger to them, they ignore it. Since I'm not hunting these young inexperienced deer (too easy to kill), I let them go. They live another day because of luck (not because I let them live, but because they got lucky to cross my path and not one of the hunters on my neighbor's property who certainly would have shot them).

When dealing with an older, more experienced animal, it is a whole different ball game (whether buck or doe). These animals have a much higher sense of what danger is. They have learned what to pay attention to. They have almost developed a sixth sense to know when danger is present.

I have watched nice bucks coming into my stand, with the wind in my face (meaning they weren't going to wind me and pick up my scent), and I've been sitting perfectly still and have been completely camouflaged. I know the deer can't hear, see, or smell me, but then he stops. He goes on high alert. It seems as though every nerve in his body is like a highly sensitive radar, searching for whatever it was that alerted him. He may never look at me. He may never cock his ears in my direction … but he knows I'm there. There are a myriad of perfectly logical reasons as to why he senses me. For instance, when I walk in the woods, my pant leg brushes against a small bush, leaving the slightest amount of scent … and the wind (that seemed favorable from where I was sitting) blew that slight amount of scent his way … maybe the smallest number of molecules necessary for his olfactory system to sense it … and that one little molecule triggered a reaction in his brain that said, "Danger!". So he freezes, assesses the situation and slowly, carefully slinks into the brush, moving back the way he came (because there was no danger in that direction), and becomes invisible in a tangle of the wild. He won that battle.

The longer one has been around as a trader, the more likely his sixth sense is more highly developed and attuned to the very subtle nuances of the market … the more likely we are to pick up on the scent of danger … or said another way, because we are more attuned to the scent of danger, we need less molecules of "danger scent" to detect and recognize that danger.

As to camouflage, this is an interesting subject. When I hunt, I am in full camouflage from head to toe. You would think that this is pretty simple … slap on some army greens and go to the woods, but nothing could be further from the truth. Camouflage, proper camouflage is an art … it is literally a detailed process that begins way before going into the woods, continues on the trip out to the woods, all the way through the actual hunt, including the exit.

Simple camouflage is meaningless. Anyone can slap on army greens and go hunting. As a matter of fact, for the most part, the pattern of the camouflage doesn't matter. If I've done my prep work, I could go out into the woods in blue jeans and a shirt with muted colors, such as grey, brown, green, or even blue. As long as I'm sitting very, very still, the deer is not likely to see me. It is my opinion that the color pattern of the camouflage that I'm wearing has less than 20% bearing on the outcome of the hunt (maybe less than 10%).

Deer are basically brown with no real camouflage coloration or patterns, yet they are very hard to see.

On my farm, we keep statistics of deer sightings. Some hunters on my farm simply see more deer than others? Why is that? It is because most hunters are like inexperienced traders. They simply don't know what to look for. You see, most hunters look for "a deer." As a result, when they don't see "a deer" their mind registers nothing … when in reality, there was a deer right in front of them.

When I hunt, I don't look for deer. I look for movement. I look for a glint of sunlight off an antler. I look for a horizontal (the deer's back) in a vertical world (trees, weeds, switch grass, etc.). I look for the flick of a tail. I listen for the slight crunch of a leaf. I study my surroundings, and because of years of experience, I am more likely to figure out where deer will be, or where they will be coming from and/or moving to. Deer don't jump up and say, "here I am."

When you trade, you have to understand that the market never says, "here I am, buy me now" (and if it did, well then it would be too late). You have to look for the nuances in the market. You have to find the "glint of sunlight off the market's antlers" or see market movement, and see it before anyone else (or at least very many people do).

You see, when I go into the woods camouflaged, I am as camouflaged as I know I can be (and hopefully I'll get better over time). I've done my research. I know that scent is the deer's biggest defense, so I will be as scent free as possible. I will wash my clothes in scent free detergent and dry them in a scent free dryer (there is a whole process involved that I won't go into at this time just for this step). I take a scent free shower with scent free soap (what about my towel, was it washed and dried scent free and stored in a scent free plastic bag … another detailed process I'll skip for now).

Getting dressed … I do not want my clothes to touch anything that would give them a scent … and I do not want to sweat either (remember, I'm in my house putting on very warm clothes so sweating can be easy … therefore, I have a system of dressing that will keep me from getting sweaty … again, I'll skip that for now).

What about my breath? That's the biggest scent maker on my body as I have no choice but to breathe. Therefore, I brush my teeth with baking soda and I take four chlorophyll pills everyday (sometimes more) during the whole deer season.

As I go into the woods, I know I'm gonna have to take my time so I don't sweat … but I will perspire, at least a little bit. Therefore, I spray myself down with scent reducing spray.

I know that even though I'm careful, I'll rub against brushes and leaves (it's pitch black in the morning going into the stand and at night coming out … so I will rub against a few). So how do I combat that? I like to find cow patties, the fresher the better, and then I tromp right through them, getting manure all over my boots. Then, using my boots, I rub the manure all over my pant legs to act as a cover scent.

There is far more to this process (I'm even thinking about writing a book on the subject) than I will go into here, but I'll spare you all the details. The key is that I go into the woods prepared. As a result, I see more deer and harvest more big deer.

One must realize that trading/investing/advising is a lot more detailed than just showing up and buying. There are many nuances that one has to learn to recognize. There are many forms of deception that the market mistress employs in order to separate you from your money.

And you have to remember that in the market, not only is the mistress trying to separate you from your money, there are predators everywhere, that are hunting you too.

You must be willing to work hard, study hard and prepare hard, and develop your sixth sense. It takes years of practice, trial and error, a thick skin and a willingness to lose money … to get to the point that you can make money, and make it consistently.

There are many more analogies and correlations to be made. I'll save those for another day … as I said, I could write a book on scent alone … and scent preparation is only a small part of being a great hunter.

Just like _____________________(fill in the blank with whatever "one thing" you want) is only a small part of investing.

GM Nigel Davies offers: 

To the best of my recollection, only Tony Miles was the first to use the injury ploy in chess, with one of his best wins being on a stretcher. In minor form, the same tactic worked for me in St. Vincent 1999 where I was on crutches. It was especially useful that there was much snow and ice around, so I was sliding around looking especially vulnerable. Now in a game not involving legs, this really shouldn't matter, but I'm sure this has an effect on the opponent's primal subconscious. It says 'victim' and he sees red.

You can see a similar effect with the pretty pouting Russian girls sitting at their boards in Washington Square. Female players often seem to try and look vulnerable on purpose. It's also worth noting Stefanova's tendency to wear off the shoulder tops, which alone probably adds some 50 points to her rating.

The other main ruses include getting into time-trouble if your position is bad, though I must say that many people are wise to this one now and know what their opponent is up to. More subtle is the idea that if you are black and have a knight on c6 and want to bring it to d7, ceteris paribus, it's better to go to b8 rather than e5 as optically your position looks much weaker.

Russell Sears offers: 

Basically, the whole point in distance racing is to run your opponents into the ground, and then leave them. You learn to sense your opponents falter by subtle clues. His breathing rhythms change, the turn is not taken as sharp, and the hill is not met.

I once wrote of the poor high school girl that had Indiana's State Cross Country race in the bag, until she looked back and saw she had a big lead with 200 meters left. You saw her pace slow, then her form crumble, and the weight of the race hit her all in a few yards. With 100 meters left, she was staggering and weaving back and forth, and with 50 meters, she was down on the ground.

In the heat of the race, your body is in equilibrium. Once you let up the lactic acids and other poisons hit you, your heart slows. I always try to coach kids by telling them that if you want to hurt less during a race, push yourself harder rather than ease up.

An expert at this was Todd Williams. He would train with 400's at sub 60 second followed by 400's at near 70. In a race against fellow USA guys, he would rip the competition up, as they, knowing he was the one to beat, would try to key off his pace.

But then again I have been in many races where the pace, heat, wind, cold etc. were the real problems, and once one succumbed to the elements, it was like one was finally excusing himself early from a bad dinner party. They all soon follow. The last one standing is often the winner, despite staggering in at the end.

I remember a classic duel between Bob Kennedy and Todd Williams I saw at the Indianapolis US Nationals. Todd was better at the 10,000 meter and Bob at the 5,000 meter. When they met at Bob's hometown at his specialty, they went out running the first six laps of the 12.5 lap 5000 meter in sub 4:00 pace, despite it being in the 90's and the track temperatures in the 100 F. By about 3000 meters, Todd collapsed and Bob continued on and won, but barely hung on at the end.

Basically, if you are not prepared to lead or go into it alone with conviction, they can easily suck you into their vortex, and send you into a death spiral. It matters little if the staggering competitions are real, feigned or imagined.

Jan

22

I haven't found it easy getting to the pitch of Surtees unusual style of play, but maybe I'm making some progress. Moves like 10 … f6 are much more suited to closed positions than those with an open e- and f-file, and I couldn't believe it when he played it. This is not to mention the very strange 9 … Qa4, and though this was probably connected with the missing 10. Qe5 followed by Bd3, the idea just shouldn't have occurred to him in such a position.

But while I'm on my high horse, I must not forget that my own addiction to the modern defense (1 … g6 against everything, every game) also created untold damage to my thinking before I kicked the habit.

The opening, incidentally, is quite interesting with 7.Qe2 being an idea of Zviagintsev that is making its appearance in 'Gambiteer' (currently being typeset). White gets two bishops and open lines for his pawn.

N - Surtees, M [B12] Heywood Quickplay,

1.d4 c6 2.e4 d5 3.f3 e6 4.Nc3 Bb4 5.a3 Bxc3+ 6.bxc3
dxe4 7.Qe2 exf3 8.Nxf3 Qa5 9.Bd2 Qa4 10.Qe5 f6 11.Qg3
g6 12.Bd3 Ne7 13.0-0 Qa5 14.Qh4 0-0 15.Bh6 Rf7 16.Ne5
Nf5 [16…fxe5 17.Qxe7!] 17.Rxf5 exf5 [17…gxf5
18.Qg3+] 18.Bc4 [18.Bc4 fxe5 19.Qf6] 1-0

Jan

20

I suggest that learning to play a game (poker, backgammon, chess, checkers or go) might teach far more than studying game theory. The big problem with drawing boards is that there's no opponent, so ideas are never subject to quite the same level of criticism, and they do not have to be quite as relevant to the very serious matter of winning.

Adi Schnytzer comments:

Game theory is not about drawing boards. People do not study game theory to help them in their game playing, believe it or not. They study it in order to understand the process of more perceived importance than board games.

Nigel Davies adds:

Please excuse my ignorance, I am a mere player. So what exactly is 'game theory' good for? And I'm talking a usable practical application that doesn't include getting a salary for teaching it to others. Please be very specific as I am very primitive.

Adi Schnytzer replies:

I recently posted the following note, which will introduce you to game theory and comment on its uses. Since it's written by the masters, it should help you out. There's nothing I can add to their wisdom.

Bob Aumann's Nobel Prize Lecture ("War and Peace") and his piece "On the State of the Art in Game Theory" are both worth reading … He also has a piece called "Consciousness," which is rather nice. These may all be downloaded here … In my view, the least (not non-mathematical) and most intuitive text available is Luce and Raiffa.

Nigel Davies adds:

There is still the problem of practical application which is what I've been going on about from the start.

In 'A Beautiful Mind,' we see that Nash figures that he and his friends should not go for the blonde because they will block each other, and somehow or other this later got him a Nobel Prize. However, it seems that Nash thought up his 'strategy' without any knowledge of the game, and from all indications, he was a virgin at the time. This sums it up - he thought he could win without any knowledge of how the pieces moved.

In a previous discussion, I brought up a similar error by a mathematician who gave a figure on the number of possible chess games. It's obvious to anyone who actually plays and knows the rules that the number has to be infinite. The guy was so arrogant and/or naive that he didn't bother to learn the rules properly before coming up with his number.

Frankly, I have the same problem with Robart Aumann's paper. It's all very well theorizing about peace, but has he actually tried to apply this? I suggest that without knowing the territory, too many assumptions will be wrong.

If it's any consolation, it seems that Lasker had a similar problem with Einstein and the theory of relativity. In Einstein's foreword to Hannak's biography of Lasker, you see that Lasker thought that there was no justification for claiming that the velocity of light in a vacuum would be infinite, unless this had been verified in practice.

This, incidentally, was one of my few moments of agreement with the Elizabethan ghost.

Ross Miller comments:

It is worth noting that the "real" John Nash never did this, just the John Nash invented by a screenwriter who got to write this movie based on his ability to write Batman movie screenplays. The example in the movie is not a Nash equilibrium. In a Nash equilibrium, you do the best you can taking everyone else's actions as given and ignoring responses to your own actions. If everyone else goes for the inferior females, you make a beeline for the superior one in a Nash equilibrium. As stated, this game has no Nash equilibrium if everyone believes that multiple hits on the same target generates no payoff from that target, but a single hit will. Nigel is correct in pointing out that solutions to this game require thinking beyond the game theoretic formalisms.

The best reason for the Nash equilibrium to get a Nobel Prize was that it facilitated the Arrow-Debreu work on a competitive equilibrium. It was because his equilibrium is an intrinsically competitive (and not collusive) concept. The screenwriter is not to be entirely faulted since the book from which the movie was based is full of technical errors and misstatements. Of course, technical correctness does not make for bestsellers and the average moviegoer is never going to understand what Nash did anyway, nor is much of anyone for that matter.

Peter Grieve offers:

My take on game theory (based on long but elementary study) is that:

1. It's not very useful in sequential games like chess, poker, etc. In chess it might help a computer make decisions based on a look ahead tree if the branches have some evaluation number. Game theory can't, of course, actually generate these evaluations, and they are quite important.

2. It's not very useful in games in which anyone has any experience. The simplifying assumptions are too great. Once in a while it could illuminate a connection that would not otherwise be obvious. But as far as selecting a detailed strategy in a real world, complex game, it would be madness to rely on game theory.

Game theory is a lot like the rest of applied mathematics. It's really strong on the simple stuff, things where its many simplifying assumptions are valid. It can act as an initial guide when there is no experience in an area. Occasionally it can suggest something new in known areas (which must then be extensively tested by experience, and often found lacking).

The problems arise when academic folks (who mostly talk to each other) get inflated ideas about the real world strength of their ideas.

An example of a situation where game theory would be valuable is the following. Suppose you where playing a game of Rock-Scissors-Paper with a really smart, vastly superior opponent who knew a lot about your mind. How can you at least break even in this game? Game theory tells us the answer. Roll a die, if it comes up 1-2, choose Rock, if 3-4, Paper, if 5-6, Scissors (roll the die in secret, of course). You can even tell the opponent that you will use this selection method, and it doesn't help him beat you (unless he can guess the way the dice will come up). He can use this same strategy on you, making sure he breaks even, and the game is at equilibrium. This seems intuitively obvious, but what if Rock breaks Scissors wins double? What sort of die should one roll then? Game theory will tell us.

Of course if Nigel reads this, he will immediately think of several possible strategies to bamboozle game theoretically inclined, mammoth brained opponents in Rock-Scissors-Paper. But if he is to win anything, he will have to bluff the opponent out of using the above strategy (perhaps by artfully convincing the opponent that his (Nigel's) mind is "primitive").

During the Cold War, everyone wanted to hire Air Force generals with lots of nuclear war experience, but there were none (General Ripper was long gone). The think tanks used some game theory. Thank goodness we never found out how valuable it was.

Adi Schnytzer comments:

Three points only:
1. Game Theory was used successfully to win a battle in the Pacific during WW2, though I don't have the details on hand.
2. Without game theory, a simple dumb computer would never have beaten the World Chess Champion!
3. Aumann's insights on war are useful, but make sense only to those living somewhere nuts like the Middle East. Those in cocoons who believe that the problem rests in a failure to love their fellow man (read: "Liberal Europe At Large") will never understand.

Nigel Davies adds:

Without game theory, a simple dumb computer would never have beaten the World Chess Champion!

How do you come to the conclusion that 'game theory' should take the credit? Why not Faraday, Edison or Graham Bell? As far as I know, none of the programmers studied game theory, but there were a few chess players on the Deep Blue team. If game theorists are claiming this, then by the same token shouldn't one be able to claim that the big bang was only possible thanks to physics professors? Now that would really be a feather in their cap - they might get two Nobel prizes!

Aumann's insights on war are useful, but make sense only to those living somewhere nuts like the Middle East. Those in cocoons who believe that the problem rests in a failure to love their fellow man (read: "Liberal Europe At Large") will never understand.

Ghengis Khan would probably have sorted the Middle East out in no time - old Ghengis was a good player in his day. OK, I guess you're going to claim that the Mongolian hordes had their own 'game theory' which enabled them to win their battles etc. So the academics can take the credit after all …

Game Theory was used successfully to win a battle in the Pacific during WW2, though I don't have the details on hand.

As should be clear from the above, I think specifics are needed in order to see why game theorists are taking credit for this one and why it's good shooting with one's howitzers, or even luck. And how many battles were lost by the way? Or weren't these retrospectively scored?

Stefan Jovanovich adds: 

There are only two reasons why the Americans had any chance in the Battle of Midway:

(1) Admiral Nimitz trusted his Navy code breakers and their analysis of the limited decryptions they had under Commander Rochefort. By translating messages and studying operational patterns, the code breakers predicted future Japanese operations. Relying on those predictions, Nimitz sent to sea the only three American carriers he had at Pearl Harbor and positioned them on the flank of the predicted Japanese line of attack.

(2) When an American scout plane sighted the Japanese fleet, Admiral Spruance put all of the American planes in the air for an all-out attack. In terms of conventional doctrine at the time, this was a highly suspect move, and its initial results were terrible. The Japanese fleet's air cover fighters and anti-aircraft gunnery annihilated the attacks by the Marine Corps scout bombers, Navy torpedo bombers, and U.S. Army Air Force torpedo-carrying "Marauder" bombers. The Army Air Force "Flying Fortress" high altitude bombers also failed but did not suffer any losses. The next attack by Navy torpedo bombers was literally wiped out; there were no planes and only one pilot survived. Only the last attack - by Navy dive bombers - succeeded.

If "game theory" includes cryptographic analysis, then its contribution to the Pacific War effort was, indeed, invaluable; but it required the willingness of Admiral Spruance to go "all in."

Adi Schnytzer replies: 

Thanks Stefan. No, it wasn't the cryptography I had in mind. According to Careers in Mathematics,

Game theory, a part of operations research, was used to select a strategy for the Battle of Midway, a turning point in the Pacific arena during World War II. The U.S. Navy was on one side of Midway Island, and the Japanese Navy on the other. We calculated our probability of winning in the four cases of our going north of the island or south of it, and the same for the Japanese. Game theory was then used to select the winning strategy.

As I recall, breaking the codes told the U.S. where the Japanese fleet was going, and game theory told them how to place their limited resources optimally. But since this isn't nearly as important as winning a chess game, why are we bothering?

Jan

19

I think Asperger's is a potential plus for traders. It is hypothesized that Bill Gates and Albert Einstein and Sir Isaac Newton may have or had high functioning Asperger's. To me, people with high functioning Asperger's (which is hypothesized to be more of a disorder of "mirror neurons" than the amgdala, read about it here). To me, people with high functioning Aspergers are "goal minded" to a fault. They can accomplish great things because of this singular patriot missile focus, but often have trouble with close motional relationships because of their difficulty empathizing with others. One of the frustrating things for them and the people who love them is that they do not intend to hurt, anger or frustrate others and are often at a loss for why others feel that way. A good book to address this is: Aspergers in Love by Maxine Aston.

Vincent Andres comments: 

About the biology of phobia and fear:

Read Snakes and Spiders Grab Our Attention and Grab It Even Faster If We're Phobic, A Sign That Perception Evolved To Help Us Spot Environmental Threats … Swedish Studies Show That We Can Spot Snakes In The Grass Faster Than Harmless Objects

Read Emotion Drives Attention: Detecting the Snake in the Grass by Arne Ohman, Anders Flykt, and Francisco Esteves

La biologie des phobies - Arne Ohman is a didactic nine page article in French with many clear sketches, and with biblio. and quantitative experiments about fear reaction delays. In short:

1. fear reactions are faster than others,

2. this is due to non-conscious short cuts

Nigel Davies adds:

I've seen an alternative hypothesis that mother nature is doing away with archaic social elements of the mind that were more useful for tribal groupings and shared panic in the face of sabre-tooth tiger attacks (or stock market falls). Asperger's seems to be on the increase worldwide, regardless of culture and with no two sufferers showing identical symptoms. These seem to be more characteristic of genetics and evolution rather than a 'disease.'

Might not the current research and attitudes be flawed through its view of 'normality' being assessed on the basis of what the majority is like? What if Asperger's represented the next step of human evolution, with the supposedly flawed neurology being perfect for the more specialist roles the world demands, and the diminishment of social instincts, thereby breaking down destructive national and ethnic barriers (not to mention the evening out of emotional swings in markets)?

Naturally those who are paid up members of the current status quo would not like the above argument. I suggest they would be likely to bend any evidence to show that they are in fact the perfect humanoids, incapable of improvement …

Jan

18

The book, David Bronstein - Chess Improviser, depicts one of the most interesting battles in chess history - Bronstein's match against Botvinnik for the World Championship. During this match Bronstein was essentially improvising against an opponent known for preparation and systemization. But for losing three drawn endgames, Bronstein might have won 5-2.

Amongst Bronstein's tactics, he constantly changed the battlefield, using a variety of different openings. He also played Botvinnik's favorite openings against him, confronting his opponent with the problem of how to play against himself. It was the archetypal battle between fixed systems and a constantly moving, shapeshifting target.

I think there's also a deeper and more philosophical dimension to this. The improviser embraces the risk and adopts the position that the only certainty is change. Proponents of fixed systems, on the other hand, wish to gain control and remove uncertainty. They want to have a method with which to achieve their goal of power but without any risk. There seems to be a certain megalomania to it all, and this is how the bad guys are usually portrayed in the movies.

In From Russia with Love, the man formulating the SPECTRE plan was a chessplayer called Kronsteen, who in the first scene was pictured winning a game against McAdam. But what's interesting is that this game is in fact a real tournament game that Spassky won against Bronstein. I wonder if this was just because it was a good game or whether Kronsteen was being portrayed as someone who could beat improvisers. As an aside one should note that the director in his wisdom removed the d4 and c5 pawns from the board, which means that Kronsteen's combination doesn't actually work.

When one leaves the confines of the chessboard, there seem to be interesting parallels in life and markets. In markets, fixed systems seem to do much worse than in chess, and I suspect that Bronstein's rapid adaptation is a much more suitable method.

Jan

12

In chess it is vital to be a good loser, much more so than being a good winner. You often get players who, on losing or missing a win, become bad tempered and attempt to blame things around them, from the spectator who rattled his change to the size and shape of their pieces. The number of possibilities is endless.

Briefly speaking, what all these things have in common is that they allow the player concerned to avoid responsibility, and the subtle element of self deceit can damage both the learning process and the player's decision making ability. This is why the best players tend towards brutal self honesty and objectivity. Anything less than that can be a fatal flaw.

Jan

11

I heard that a chess colleague had lost everything except his house with sports betting. I must say that I'm quite surprised as he has always been quite cautious with his commitments, certainly on the chess board. And as it happened quite suddenly, it wouldn't have been a death of a thousand cuts.

Chasing a bad bet? Probably. It's unlike the S&P, which can only go down to zero (which it probably won't) and there's no drift.

Jan

11

Try to start each morning thinking of something and someone you're grateful to in your personal and professional lives, and think specifically what you are grateful about. You will discover that you can't be earnestly and sincerely grateful in a heartfelt way and at the same moment in time feel that anything is wrong or missing in your life. It is from that position that one can often make the best decisions that will stand the test of time.

Every time you make decisions from scarcity, fear, jealousy, etc. they are often as flawed as those mindsets are poisonous to your mind.

By the way, try to find the people involved in what you are grateful about and express it to them. It will not only make their day, it will make you a little bit more deserving of success and happiness because you were temporarily able to leave your self-absorption that can very easily become a black hole.

Nigel Davies comments: 

In chess, to coin a phrase, it depends on the position. Sometimes there's a second chance, sometimes there isn't. Schlechter and Bronstein came very close to winning the World Championship and the point at which they missed their opportunities has been traced to single moves. In Schlechter's case the outcome was particularly tragic as he subsequently died of starvation. A Bronstein win probably would have improved his situation also, no matter what he said in retrospect.

Of course most of the moves we make in life are not usually so critical. If we miss one, we go on living even if it was some kind of key moment, and things then take a different course. They may be better or worse depending on which variation we find ourselves in. And probably we should not dwell on 'what might have been' for it distracts the attention from the game we're actually playing.

But the thought that haunts me is that our choices may be more limited than we think; it is difficult to be anything other than ourselves and most of the outcomes will be an extension of this. Perhaps we can learn to make better decisions and I believe that my struggle with the chessboard (and now markets) has been largely about this. As I like to tell my students, a genius is a man who only makes the same mistake five or six times, most of us do it for our entire lives. 

Jan

7

This is a fascinating story that I've known about for some time with much wider implications than the rehabilitation of back injuries.

The idea that one might learn to use alternative muscle groups is close in spirit to the economic way of thinking (substitution) and a similar process might take place with, for example, those on the autistic spectrum who 'cure' themselves by 'learning' social skills with other parts of their minds.

From Strongman Sells Determination in Spinal Clinic: 

"In the past 10 years, more than 7,000 people who were not able to walk left my clinics on their own two feet," he said.

If you want to read about Valentin Dikul and his VDM method, check it out here.

Jan

7

Is this the best trading book of the past year?

No, but Blink by Malcolm Gladwell generated more ponderable and testable trading ideas for me than any other book in recent memory.

Blink is about how intuitive decisions are made. The book is composed of a series of scientific case studies, each of which brought an 'Aha! Trading' moment for me. The cumulative sum of these ideas easily filled a couple of notebook pages, the study of which will fill and influence months of work.

One example the book shows is how a simple, small factor algorithm surpassed ER doctors in determining if a patient was actually having a heart attack. The conclusion was that the judgment of ER doctors was affected too much by information.

As traders and market researchers, we are continuously confronted with too much information, and we usually end up going down paths like 'If (this and this) Then…' or 'If (this or this) Then…' but we rarely go down paths like 'If (this is not present) Then…'

That type of twist, from 'and/or' to 'not' is precisely what made Blink so interesting for me: the ideas it generated were more revolutionary and perspective-changing than evolutionary.

Sam Humbert comments:

…a simple, small factor algorithm surpassed ER doctors in determining if a patient was actually having a heart attack. The conclusion was that the judgment of ER doctors was affected too much by information.

I've been thinking about this lately. Since this fall/winter has been warm in New England, I've been out on my bike at least once a week. And I need to dress properly, given the winter temperatures and the self-generated windchill from riding reasonably fast.

What I've found through trial-and-error is that I'm better off going to weather.com and dressing based on a mechanical system (40s = jersey + 2 fleeces, 50s = jersey + 1 fleece, low 60s = jersey + windbreaker, high 60s = long sleeve jersey etc., adjusted for unusual wind or rain). Then I am by standing in my driveway to "see how it feels."

My subjective markings, it turns out, are prejudiced by ephemeral factors (sun is behind a cloud, a gust of wind blows through) and also by preconceptions ("it's winter, so it should be cold and windy," "it was warm yesterday").

I've sometimes gotten darned hot or cold by dressing by "how it feels," but I'm never too far off dressing by weather.com.

Rod Fitzsimmons Frey adds: 

I'm glad that others got good things out of Blink! I thought it was one of the most deceitful books I have ever read. Perhaps I judged too quickly (blink!) and read the rest through a negative filter, but I thought it was an anti-intellectual defense of emotional intuition over careful rationality.

As a remedy I suggest Think!: Why Crucial Decisions Can't Be Made in the Blink of an Eye by Michael LeGault, as a fast-and-dirty response, or The Closing of the American Mind by Allan Bloom as a much deeper criticism.

Dr. Aronson addresses the ER physicians example (or something like it) in Evidence Based Technical Analysis (around p.42). He cites many studies that show that human decision making is very effective for linear and sequential problems and hopeless for configural thinking. When faced with configural problems, humans tend to reframe them into linear or sequential problems. Often this works, but for some things (like medical diagnoses), it is disasterous. It was a much more satisfying analysis of the issue than given by Gladwell.

Nigel Davies adds:

One of Bent Larsen's favorite expressions was 'long think, wrong think.' I think there's a lot of truth in this. Many people seem to tie themselves in knots by thinking too deeply and by considering so much information that they simply confuse themselves. But there's a paradox here in that good intuition requires mastery of the medium concerned, and that requires extensive testing, revising and doubting of one's conclusions.

I'd suggest that it's easy to play a blinker, but it's hard to play a master who can blink.

Jan

4

Does anyone have any comments or suggestions on breaking through psychological barriers? I have been stuck at a particular equity level now for an extended period and each time I start to break through I get sucked back down. So everyone can thank me for yesterday’s volatility, as I came in long the NASDAQ ran up to my wall, so I then sold at the peak, only to buy back too soon or else too heavily into the decline. I have tried sneaking through this wall with small trades. I have tried jumping through with larger trades. I have tried not even looking at my equity for a while.

I am beginning to feel as I did when I was a little kid and my brother (who is five years my senior) used to play goal line defense against me. I would try to make it over the couch while he pushed me back, but I never could.

Dr. Mark Goulston adds:

I think one of the keys to overcoming psychological barriers is to have a clear and specific a vision (vs. merely the desire) of where you want to get to, that is both compelling and convincing to you over a prolonged period of time. That is usually necessary to generate the requisite commitment (i.e. focus, concentration, persistence and perseverance when you hit walls). Then have a step by step plan for getting there with back up plans for any and every setback you can imagine. Then re-evaluate periodically whether you’re staying with that plan and don’t change it without good reason (especially true for plans you have checked with trusted advisors whose input you listen to).

My personal vision is to develop deep, sustained and mutually rewarding relationship with some of the most respected and powerful people and then influence them in a way to make the world better. Maybe a little idealistic, but I’ve become friends with Warren Bennis from USC and am working on relationships with Jim Sinegal from Costco, Bob Eckert from Mattel, Frances Hesselbein from the leader to leader institute (formerly Peter Drucker Foundation), and Marshall Goldsmith the internationally renowned executive coach, so I think I’m off to a pretty good start. A big help has been my partnering with Keith Ferrazzi, author of best selling book, Never Eat Alone which I urge all of you to buy and read.

Grandmaster Nigel Davies Comments:

I believe the key to psychological barriers in most fields is down to our expectations of ourselves. Kids and adolescents haven’t learned ‘their limits’ so they tend to improve very rapidly. Older folks (20+) have a problem in that they ‘learn their place’. So typically you see acts of self-sabotage by players who are outperforming (see Icarus) whilst those having a bad tournament will fight like tigers to reach their norm.

The feedback one gets from one’s peers can tend to reinforce these feelings. So to improve it’s useful to acquire an excellent peer group for whom success is normal. For this reason I always tried to hang out with the Russians rather than the weak Westerners, and they normally tolerated me because of wanting to improve their English. And I posit that we are in the right place for similar reasons.

But what you may be experiencing may not be this kind of psychological barrier. The problem I’ve found with markets is adjusting to the ‘phase shifts’ when it starts to behave quite differently. A model which suggests that individual striving is the key may be too one dimensional, and perhaps what is required is to dance.

Jim Sogi offers:

The New Year kicked off a new phase shift, or a return to the old. Anecdotally, regular people are starting to get interested again in the new market highs and small cap techs after having stayed away during the steady but slow gains of the last 4 years of worry. Even the hoodoo who lost all his money is getting people at the beach to trade on hot tips. Things that make you go Hmmm.

Different tactics may need to be considered and tested. The issue may not be psychological.

Steve Ellison adds:

In “Secrets of Professional Turf Betting,” Bacon proposed varying tactics through the year based on the improvements of 3-year-olds, variances in weight allowances, effects of mating season, etc. For phase shifts such as the shift from winter to summer tracks, Bacon proposed general methods that could be used at any time, but were particularly useful at times when data was insufficient to evaluate the new regime. One such method was to pick the horse with the highest percentage of races won in the past year. Another was to note which horses had begun working out earliest at a new venue and study their workout times.

Jan

2

I only found one market open yesterday, and it was Israel, which was up 1.5%. One was also wondering what kind of predictions one could make, a la the probability that the team that scores first in a basketball game will win the game, and if this is connected. Alan Abelson says that he sees 2007 shaping up as a year like 2000, and he feels the sense of Deja Vu. He has been saying this 2002, and from 1990 to 1999, when he felt a sense of Deja Vu referring to 1987. And from 1964 to 1987, he felt a sense reminding him of 1929. It is insightful to see the techniques of the perfect lie, or propaganda that he uses to maintain his self image, presumably rather than to deceive his readers. His two favorite techniques are to say that he didn’t really expect the year to play out as favorably as it did or that his crystal ball has not been entirely accurate, and his very sagacious short selling friends who have not done too badly see the problems of our economy as discounted to an inordinate extent.

Gone is the old technique of saying that the market will go down without limit until the last excess of ebullience is gone. He also doesn’t use the technique of the Elizabethan Ghost to indicate that it is wrong to be always bullish because the up trend has a variance. The problem is the uncertainty of knowing when the mean and variance of the drift have changed. Presumably if the drift were 50% a year, rather than 10,000% a century, people would be reluctant to say that their fears over-ride it, and that they would prefer to be short.

On another note, I have received numerous letters asking me if the tendency for years ‘07 to be bearish is predictive. I point out that with the last two ’07s being 1987 and 1997, with returns of 4% and 20% respectively, and 1967 being up 20%, one should not place any reliance on a pattern with 10 observations that hasn’t worked three of the last four times. The same would be said for all the foolishness about the January Barometer. It hasn’t worked for three out of the last five years, and was random before that.

I see many year end forecasters are looking for technology spending to be up some 20% or so next year. One wonders what the best way to play this might be, given the relatively lackluster performance of technology in last year.

Finally, I am convinced that training in checkers is much better for children than chess, in that it prepares them better for the basic yes, no decisions of life that make up much of logic, electronics, and computers. It is simpler with a less confined rule base, with much more potential for generalization to the situations of life. It also has the virtue of not consuming so much time to become proficient, (now that it takes a football team and extensive technology and years of study to become even a competent chess player). As well as being better to learn, it’s also much less life threatening to eat a checkers piece rather than a chess piece.

GM Nigel Davies responds:

I believe this should be tested, and probably on a larger sample than exists on the list.

I do have one observation to add, and that is that the chess players who went on to become very successful appeared to have one thing in common. They either stopped playing altogether or relegated the game to the status of a very minor hobby, which rather confirms the chair’s hypothesis that it takes up too much time.

Vis. a vis. choking hazards, I found this prevention.

Peter Grieve comments:

The chess vs. checkers comparison brings to mind fencing vs. boxing. I’d rather that a child of mine would be a boxer, but I’d much prefer to be a fencer.

The late GM Tony Miles wrote a piece extolling the virtues of checkers, and bemoaning that the fan base wasn’t larger.

Most of the great Georgian (British) boxers were fencers also. I think this was very useful cross-fertilization.

Dec

27

The two belonged to almost the same generation, and both witnessed the 1929 crash first hand. One became wiser and prospered as a result, and the other committed suicide.

I always considered Livermore the ultimate mythical figure in markets, and not Benjamin Graham. If I had one criticism of Practical Speculation, it would be the exclusion of Livermore as the man who decimated the most ill founded wisdom about markets. I contribute that to the fact that his method was simple enough for the high school drop out to understand and apply, as well as to his colorful lifestyle and womanizing.

Livermore’s work can be summarized in very few words. Buy when stocks are going up and always buy at market, and do the opposite with down trending stocks. It is mind boggling how any logical person can believe that such an easy to follow system would make money over the long term.

I believe I had the same copy of How to Trade in Stocks that Victor has, and actually went out of my way to program the formula in red and blue at the back of the book into a simple computer program, before I realized that what he calls natural reactions of six dollars and more, according to the formula, mean that you should sit through decreases that will wipe out any margin you could have. He neglected to use percentage points, so according to him a six dollar reaction on a hundred dollar stock should be dealt with the same way as on a four hundred dollar stock.

In brief it is totally inapplicable in this day and age where computers execute millions and millions of dollars worth of trades at the click of a mouse, and where even arbitrage opportunities became obsolete in consequence. Its applicability to today’s markets is questionable even if you are sensible enough to change the numbers into percentages and apply it to the thousands of stocks that are under the hundred dollar mark. I even question its applicability at the turn of the last century when it was believed that Livermore prospered just by using this simple formula.

Yet, seemingly very smart people idealize Livermore, but probably more for his life style — his Yachts, his mistresses, his cigars and his mansions.

I ended up selling the book to The C.E.O. of a brokerage firm for a few thousand dollars, it is a thin book of under 100 pages. Like Ben Green (not Ben Graham) I felt I made a very good trade given the useless content of the book, but left the new owner with the impression that he got a steal out of this little boy who probably does not even know who Livermore is.

Ben Green advises that you should never show anxiety to sell to the buyer. I dare say that unlike Livermore he would have never bought stocks at market.

Green also put a very high price on his horses to test the knowledge of the buyer. While Green’s techniques could be useful in today’s markets, some twists are appropriate if not necessary, as buyers now have more choices, and again at the click of a mouse can find out the prices of a product at a hundred different suppliers around the globe.

In fact today, sellers do the opposite and fake urgency and anxiety to sell a product, just to get the buyers foot in the door. Everything Must Go, be it due to bankruptcy, a new season’s merchandise, renovations, etc … Once the buyer gets into the store to take advantage of the seller’s urgency however, he/she finds out that the seller used Green’s second technique of setting the price too high to test the buyer’s real knowledge of a bargain.

GM. Nigel Davies responds:

My reading of Livermore is different.

When reading his two biographies it seemed to me that first and foremost he was an intuitive tape reader. What he was not was an educated man, so his attempts to systemise what he thought he was doing were pretty bad. Those looking for something similarly poorly organised and unscientific should take a look at Nimzowitsch’s My System or Hans Berliner’s The System. The latter in particular would seem to have little excuse as he is a professor of computer science at Carnegie Mellon University.

I would argue that given the size Livermore was trading he must have been rather remarkable to do as well as he did, and this may well be indicative of a substantial market edge, at least in his heyday. And inevitably he got wiped out when he was wrong, a simple case of wild money management.

Larry Williams comments:

I would argue that he was a market manipulator … the Reminiscences [Full PDF] book was not exclusively the life and times of Jesse, it was a composite that first appeared in the Saturday Evening Post.

The real life and times of the man links him to Joe Kennedy and lots of market “campaigns”. His personal life was a disaster — deep depressions, children shooting one another or their mother, I forget which.

His fortunes wane almost the instant the SEC came into power, but it is certainly a well written book that has captured the imagination of traders ever since.

Dec

26


 The concept of dynamic potential in chess is used to describe the potential energy contained within positions and explains much of the area in which classical chess theory (concerning space, weak pawns, material etc) tends to get it wrong. As with the Bosphorous, the underlying currents can often be going in the opposite direction to what is apparently on the surface. So when one player appears to be on the attack, in reality the floor can be crumbling beneath him. Or a player who is being pressed might be ready to exploit the weak squares that his bridge-burning opponent is leaving behind.

I believe that such energy flows are even more evident in markets than in chess, e.g. money that is withdrawn and on the sidelines increases dynamic potential. Of course the big question is how to measure this potential, and with chess it tends to be more art than science. Strangely enough the two players that stand out in my mind as being most adept at this are Leonid Stein and Tigran Petrosian. But despite the apparent dissimilarity in their styles, both are masters of the exchange sacrifice (i.e., rook for bishop or knight).

There are some known phenomena in markets, in which dynamic potential noticeably increases, such as Victor and Laurel’s healthful day (i.e., when everything is down). It would also seem to be interesting to consider loud events which might attract new money or evict some of the old, such as the ‘new high in the Dow’ or ‘two bucks to the pound’. At such times a market might well get out of sync with the usual wheels and pulleys that bring it back into line.

Dec

26

The case for deception in markets is an interesting one, but for several reasons I hypothesize that what we are seeing may be self-deception:

Deception on such a large scale would imply that some kind of collusion is involved by market participants as no one source of participants is large enough to move a liquid market.
Let’s say that last time there was a particular memorable event a related market moved sharply in a particular direction. Those who were stung the previous occasion are likely to liquidate their positions on the basis of ‘once bitten, twice shy’. Thus they move the market in the opposite direction to last time prior to the event in question.

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