VictoriaF wrote:...the advantages calculated based on the assumptions of rationality may be canceled by the behavioral and neurological disadvantages.
To clarify, John Coates whose book The Hour Between Dog And Wolf
(THBDAW) I cited earlier, argues against
the Efficient Market Hypothesis (EMH) with references to Kahneman's and Shiller's statements as well as to the neurological evidence. In Thinking, Fast And Slow
(TFAS), Kahneman described his adversarial collaboration
with Gary Klein (TFAS, pp.234-244). In his book Sources of Power
, Klein analyzed how experienced professionals developed intuitive skills. In contrast, Kahneman's experiments demonstrated that people committed cognitive biases even in the areas where they were expert.
After several years of joint work, Kahneman and Klein produced a paper "Conditions for Intuitive Expertise: A Failure to Disagree." In the paper, Kahneman and Klein relied on Herbert Simon's definition of intuition as "nothing more and nothing less than recognition" (TFAS, p.237). While the confidence people have in their intuition is not
a reliable guide to the validity of this intuition, some types of intuitive judgement may be valid if they satisfy two conditions for acquiring a skill:
1. an environment is sufficiently regular to be predictable
2. the regularities are learned through prolonged practice (TFAS, p.240).
Kahneman and Klein used the intuition of firefighting teams' commanders as an example of a reliable
Is the investing field regular enough to build reliable intuition?
Coates refers to Robert Shiller who believes that "investing is like any other occupation, and that intelligence, education, training and hard work can indeed improve your performance" (THBDAW, p.94).
Coates thinks that the logic of the EMH has dissuaded many potential analysts from looking for tradable patterns and thus enhanced the performance of those who have persevered in defiance of the EMH. Coates's data indicate that "the experienced traders who consistently made money, even through the credit crisis, were ones whose Sharpe Ratios had risen over their careers" (THBDAW, p.95). Apparently, there is such a thing as trading skill
Coates positions the Somatic Market Hypothesis (SMH) developed by neuroscientists Antonio Damasio and Antoine Bechara as an alternative to the EMH. According to the SMH, each event we store in memory comes marked with bodily sensations we felt at the time of the event. So-called "somatic markers" include subtle tensing of muscles, quickening of breath, a frisson of excitement, etc. These markers combine in the form of intuition that influences our decisions (THBDAW, pp.95-96).
Even if the trading skill can be identified and isolated, it is counteracted by other neurological factors, such as those creating the winner effect
(THBDAW, pp.27-29). As one wins (in a battlefield or in a market), his confidence rises--eventually leading to overconfidence and reckless behavior.
I don't have any evidence to prove that the Boglehead mentality is wrong. It is right for most people. However, I have presented some evidence that:
- (1) trading skill is not a myth; psychologists, behavioral economists, and neuroscientists have explanations and justifications of trading skill
(2) achieving trading skill is far from trivial; it requires 10,000 hours of deliberate practice, or something like that
(3) even those with demonstrated trading skills may fail due to various neurological influences.
WINNER of the 2015 Boglehead Contest. |
Every joke has a bit of a joke. ... The rest is the truth. (Marat F)