The Quiz Daniel Kahneman Wants You to Fail

From Vanity Fair:

Plainly put, a “heuristic” is a tool we use to simplify the decision-making process. For example, if you’re driving in the United Kingdom for the first time and don’t know the traffic laws, heuristics might help you correctly assume that a green light means go and a red light means stop. By applying what you already know about driving in America, you won’t have to waste hours reading up on England’s traffic laws. However, that same heuristic could prove harmful if you start driving in the right-hand lane, against traffic. Research psychologist Daniel Kahneman–Nobel Prize winner, and the subject of Michael Lewis’s article in this month’s issue, “The King of Human Error”–spent a great part of his life’s work discovering and cataloging the heuristics people use.

Take the quiz.

Note: Oh, yes, trend following is all about heuristics.

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4 thoughts on “The Quiz Daniel Kahneman Wants You to Fail

  1. Cool, only failed question nr.(3)! In fact, more and more trading and specially trend following changes your way of thinking, not only in trading but in many life situations

  2. number 5 explains billions of dollars worth of trades, many dumb. I was exposed to this research many years ago. Risk seekers in the domain of losses and risk avoiders in the domain of gains was in a paper I was shown in the late 90’s. Translates into, hey I’m up 10% I better take my gain, (and perhaps sell something that triples), and hey I’m down 10%, I can’t sell until I am even, and of course it turns into a huge loser. The explanation they gave for the boneheaded things we do “asymmetric payoff profiles” = the pain of a loss outweighs the joy of a gain. So people put off small losses to avoid the pain and turn them into huge losses. They then offset that by taking the small gains to get through the day. Trend followings answer to the behavioral foible, set loss limits and let our winners run. Seems logical to me. If you can’t get past this behavioral dilemma you will never rack up big returns.

  3. Tom,

    Bang on! I’ve seen smart guys (engineers and a MBA in finance) swear they were going to trend follow…and then lose their (very large) stakes because they cracked under pressure and took the small gains and the big losses.

    I’ve said several times that Ed Seykota or Bill Dunn could give away their trading algorithms for free…and 95% of traders would STILL lose money because of the psychological pressures.

    Little do the short-cut seekers realize that the trading system per se is about 5% of the holy grail…your brain and money management account for most of your success.

    If someone doesn’t believe that, try a system of random order entries and manage it properly…odds are, you’ll make money.

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