A few weeks ago I picked up the book “Superforecasting” by Tetlock and Gardner. It was so good that after I read it I read it again.
In it the authors go over their experiments to find out first if there was such a thing as a superforecaster and second if there were (and there are) what makes them that way and if was teachable. Lucky for us the results of the experiment, and it is ongoing, is that while some people are more suited to forecasting than others, it is teachable and almost anyone can improve their forecasting skills.
What I was most struck by was how much of forecasting is really knowing and battling the different mental biases we all have to greater or lesser degrees. Computational power, knowing math and probabilities and similar skills, matters and can help a lot but the majority of the book was really dealing with how to think and control your thinking and less on how to do Monte Carlo simulations (actually they just mention them as the book is not math heavy at all and can be read and used by almost anyone who can read).
I liked this because it fits in with something I have been working on for some time. Over the past few years I have been working on a list of biases that I have and a checklist to make sure I am addressing them every time I am looking at putting on a trade. While my questioning is more in depth and specific even just the exercise of asking yourself questions like “Recency bias: Am I over or under weighting recent data relative to older data? If so why?” can go a long ways towards at least lessening the impact, if not doing away with the bias completely.
You can ask yourself similar questions for any other bias or problem that you find yourself struggling with. Anchoring, sunk cost, disposition effect, outcome bias, bandwagoning, etc are but a small list of known biases that have been shown to greatly affect investment results. Go read “Superforecasting”, “Predictably Irrational”, “Nudge”, and anything else by Ariely, Kahneman, Thaler, Maubossin, and other researchers in behavioral science and you will learn how to spot a bias and often how to counteract it.
Of course I understand that none of this, at least to the extent that I am writing about it here, is truly new. Most readers of this site know about investing biases and how they can mess with our results. What I am trying to encourage you to do is to be systematic about it and actually make a checklist to combat any investment return killing bias that you suffer from.
In trading after we get past the CFA/CMT level knowledge base (both great programs but really just the beginning of this game and not the end), broadly speaking, there are only two real advantages in this game. You can have more and better computational/data power and/or you can become a better and more disciplined thinker. While we should strive to get better at both it has been my experience with me and all the investors/traders I interact with that we are our own worst enemies.
I could go on all day but will end with this: make a list of biases, figure out how they affect you, measure them going forward, and then tweak and improve as necessary.
P.S.-go buy the book “Superforecasting”, I only touched on how it pointed out many biases and how our thinking is usually our worst enemy but the book was packed with info on how to better forecast just about anything and think through problems. In addition it was entertaining and only a few hundred pages.