A Turtle Master's Insights on the Art of the Trade

Once again, Jonah Lehrer has an article in Wired magazine relevant to trading, in We are All Talk Radio Hosts:

Let me tell you a story about strawberry jam. In 1991, the psychologists Timothy Wilson and Jonathan Schooler decided to replicate a Consumer Reports taste test that carefully ranked forty-five different jams. Their scientific question was simple: Would random undergrads have the same preferences as the experts at the magazine? Did everybody agree on which strawberry jams tasted the best?

Wilson and Schooler took the 1^st, 11^th, 24^th, 32^nd, and 44^th best tasting jams (at least according to Consumer Reports) and asked the students for their opinion. In general, the preferences of the college students closely mirrored the preferences of the experts. Both groups thought Knott’s Berry Farm and Alpha Beta were the two best-tasting brands, with Featherweight a close third. They also agreed that the worst strawberry jams were Acme and Sorrel Ridge. When Wilson and Schooler compared the preferences of the students and the Consumer Reports panelists, he found that they had a statistical correlation of .55. When it comes to judging jam, we are all natural experts. We can automatically pick out the products that provide us with the most pleasure.

But that was only the first part of the experiment. The psychologists then repeated the jam taste test with a separate group of college students, only this time they asked them to explain why they preferred one brand over another. As the undergrads tasted the jams, the students filled out written questionnaires, which forced them to analyze their first impressions, to consciously explain their impulsive preferences. All this extra analysis seriously warped their jam judgment. The students now preferred Sorrel-Ridge—the worst tasting jam according to Consumer Reports—to Knott’s Berry farm, which was the experts’ favorite jam. The correlation plummeted to .11, which means that there was virtually no relationship between the rankings of the experts and the opinions of these introspective students.

What happened? Wilson and Schooler argue that “thinking too much” about strawberry jam causes us to focus on all sorts of variables that don’t actually matter. Instead of just listening to our instinctive preferences, we start searching for reasons to prefer one jam over another.  For example, we might notice that the Acme brand is particularly easy to spread, and so we’ll give it a high ranking, even if we don’t actually care about the spreadability of jam. Or we might notice that Knott’s Berry Farm has a chunky texture, which seems like a bad thing, even if we’ve never really thought about the texture of jam before. But having a chunky texture sounds like a plausible reason to dislike a jam, and so we revise our preferences to reflect this convoluted logic.

And it’s not just jam: Wilson and others have since demonstrated that the same effect can interfere with our choice of posters, jelly beans, cars, IKEA couches and apartments. We assume that more rational analysis leads to better choices but, in many instances, that assumption is exactly backwards.

In trading, as in judging jams and jellies, overthinking can result in an inferior decision.

Just today, I received an email from a trader who wanted some mentoring.  He had already devoured 18 different books on trading. It’s hard to know where to start. How does one reconcile the conflicting advice from so many different “experts?”

At some point, you just have to pull the trigger and start trading. Too much left-brain analysis and thinking will only make it harder to figure out what to do. That’s one of the major reasons that simple trading ideas work best. There is less room for overthinking and less potential for the paralysis of analysis to set in.

If you want to be a great trader, you need to start trading. Start small at first, but just start trading. Books and advice only get you so far. You’ll need experience with your own trading to know how to apply the advice from experts.

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