2024-01-14

Thinking Fast and Slow

Today, I started reading 'Thinking, Fast and Slow' by Daniel Kahneman. I've only completed the first chapter, but I've already noticed several similarities to trading.

1

Daniel talks about two systems of how our mind thinks and works, System 1 and System 2. System 1 is responsible for things like...

  • 2+2 = ?
  • Complete the phrase “bread and …”
  • Detect that one object is more distant than another

    • and much more. System 2 is responsible for things like things like

  • Fill out a tax form.
  • Check the validity of a complex logical argument.
  • Tell someone your phone number.
  • 34×43= ?

    • System 1 and 2 run simultaneously; when System 1 encounters difficulty, it will call on System 2 to help solve the problem. Often, this happens naturally. For example, 2×2=?, and System 1 will directly tell you it's 4. The capital of France is … Paris. However, when faced with a more complex problem like 34×43=?, System 1 needs to call on System 2 to assist in solving it.

    Now watch this videos before reading any further.

    https://www.youtube.com/watch?v=vJG698U2Mvo

    If you haven't heard of this experiment before, you probably did not notice the gorilla. System 1 is responsible for orienting and perceiving what is needed in this case. System 2 requires some surprising stimulus or attention to be detected, or to notice the gorilla, which was not the case in this video. If you rewatch it, you won't unsee the gorilla. System 2 also monitors your behavior while maintaining for example in control when you are angry. System 1 and 2 always work together and are highly efficient; System 1 cannot be turned off. One of the tasks of System 2 is to overcome the impulses of System 1. In other words, System 2 is in charge of self-control. But what does that have to do with trading?

    When I first started trading, it sometimes just came over me, as if I were possessed by some higher force controlling me. In hindsight, I looked at my trades, did not understand what happened or why I took those trades; I just functioned out of my impulses. Now, I've come to realize that this was just me letting System 1 go on a full-on rampage. I didn't even give System 2 a chance to work.

    >Here are several points you can incorporate to help you let System 2 do its thing:

  • Have a plan and follow it (not only for each trade but for everything surrounding your trading).
  • Before every trade, take a deep breath to let System 2 work.

    • You have to notice what System 1 does and keep responding with System 2 because you know better. 'Learn to recognize situations in which mistakes are likely and try harder to avoid significant mistakes when the stakes are high.

    2

    System 1 will tell you the bottom one is longer. When measuring (using System 2), it will show you that both are the same length, but you will still keep seeing the bottom one as being longer no matter what you do, the same is true in trading.

    Thanks,

    Finn