Trading Psychology 2.0. Steenbarger Brett N.

by distributing his orders over time with as little visibility as possible. The change that Joe needed to make was not a psychological one; like Emil, our restaurant entrepreneur, he needed to engage the marketplace in a different manner.

      So why is there such an obsession with “conviction” in the trading culture? Very often, the focus on conviction keeps people from pursuing change. After all, why do anything different if you're convinced what you're doing is fine? Imagine a soldier scouting enemy terrain. The odds are good that he will not operate on the premise of conviction. He will move differently through forests and fields; he'll treat every building as a source of potential threat and will remain ever-vigilant for explosive devices. In a changing, dangerous environment, conviction gets you killed. We can only glorify confidence in trading if we cease to view markets as dangerous environments – itself quite an act of overconfidence.

      In part, our focus on conviction as a success driver may simply reflect the cognitive consequences of survivorship bias. In any group of traders, the ones who lead the pack in absolute returns will almost certainly be high risk-takers. Now, of course, the cohort of worst-performing traders will also include the high risk-takers. After all, few market participants blow up their books on small bets and low conviction trades. But if we're looking for the successful market wizards, we'll usually identify those who have made the most money and, if we talk to them, we'll generally discover that they went all-in on at least some of their trades. That hindsight perspective easily leads to the assumption that a defining element of trading success is supreme confidence and risk taking.

       The problem is that supreme confidence rarely permits supreme flexibility. In previous writings, I've mentioned research pertaining to positive attribution biases. We tend to attribute positive outcomes to ourselves and negative outcomes to situations. So, for example, we're likely to pat ourselves on the back for a good market call when we make money, but complain about rigged markets when we're losing. Similarly, we tend to view ourselves in an unusually favorable light when we compare ourselves with others. A favorite exercise for a medical student class I taught asked the group to evaluate themselves relative to their peers on such adjectives as “caring” and “motivated” using a five-point scale, where 1 = much below average; 3 = average; and 5 = much above average. As you might guess, very few students rated themselves as average or below; consistently, 90 percent of the group deemed themselves to be better than average!

      When I've given the exercise to groups of traders, the positive attribution bias has been every bit as clear. Most traders rate themselves as above average in ability, despite results that generally don't support such a view. When asked about the discrepancy between their self-perception and their actual trading performance, they cite their potential, their recent improvement, situational influences hampering performance, and the like. The problem is that traders who overrate their abilities are not likely to be proactive in recognizing the need to adapt to shifting market conditions. Joe viewed himself to be a very successful trader and attributed his recent poor performance to a “slump.” That led him to seek help with his psyche, though what he needed was a way of adapting to an altered market-making environment. But the same overconfidence bias that can affect single trades can threaten trading careers. Belief in oneself is necessary for success; flexibility in self-belief is necessary for ongoing success.