Book Review: Market Mind Games

[nickola.pazderic]

Market Mind Games: A Radical Psychology of Investing, Trading, ands Risk. Denis Shull. New York: McGraw Hill, 2012. $30.00.


We are all getting ready for another year. All is reset to par, and we can give it another go. Just in time for this return to the (virtual) pits, I have a review of Denis Shull’s Market Mind Games: A Radical Psychology of Investing, Trading, and Risk to share with the Effective Volume community.

(I know I’m a little late. Everyone is either in bed or getting ready for actual trading. But I’ve read the just-off-the-presses book, and apparently I can’t hit the sack until I produce a review. Consider it my best attempt at some pay back for the amazing work done by the leading contributors here.)



Ms. Shull’s book promises nothing less than to help speculators “seize the advantage in every risk decision with the most misunderstood asset you have—human emotion (book jacket).” Human emotions? Are not feelings at best prompts to rational action and at worst detriments to the fine actions upon logic? For Ms. Shull, this view of emotion is both counter-productive economically and counter to the prevailing research in neuroeconomics and cognitive science.

Ms. Shull was a trader before she took advanced training in cognitive science. Her main point is simply this: Any approach to the market that attempts to understand it and profit from it through strictly quantitative means fails to consider the contexts that can best be apprehended by intuition and emotion. “Numbers limitations: Neurons limitations—a coincidence? (p.37).” Throughout the first half the book she establishes that brain research, in particular the activity of the largely undervalued grey matter, shows that decision making is far more complex and nuanced than “trading the plan” programs allow. It is her contention that frustration and failures will always plague those who suppress their emotions in their attempts to be rational; and, what’s worse, any attempt to suppress emotions via reason are bound to failure. Speculators must learn to understand the messages sent via their emotions as the personal psychological context in which they make their most rational choices.

Ms. Shull returns again and again to the fundamental aspects of market activity. The first fundament is simply this: every market participant implicitly or explicitly acts with an estimate or interpretation of the future price of some object of value, be it a stock, futures contract, or bond. In this sense, the market is not a mathematical problem—though it can be modeled and studied mathematically; more importantly, the market is always and forever a social institution. Keynes had it right when he proposed that speculators must assess every trade from a third degree of social awareness; they must judge what the average person expects the average person to do and then make a wager based on this very social, highly contextualized, and fundamentally psycho-social awareness. Price is, therefore, a product of perception. According to Ms. Shull it is as important if not more important than number crunching and technical analysis to know oneself and one’s emotional responses.

With the IWM and GDX robots, we have elaborate and back-tested decision trees, which respond to live data with emotion-free trading recommendations. Despite the rigor, it is difficult for wet ware creatures to follow the dictates of the robot without anxiety. We could see during the recent set of trades some of the limitations with the programmed approach. For example, if a buy sequence is issued when a variable rises to the level of 70-- because clear lines must be drawn to create an automatically functioning device-- from the context we robot followers may be leery: for we know that the robot cannot be as certain as we would wish when such an arbitrary cut off is hit or missed by a digit. It is in conditions such as this that the comments of experienced hands to take light positions or even take time off (as Billy noted due to low volume and lack of respect for floor pivots during holidays) are very welcome and highly useful. Indeed we use our experience and contextual understanding to improve upon robotic results even though, as a rule, we should not. In the future, real time access to the money flows and other crucial Effective Volume indicators promises to enable speculators to enhance understanding of the context of big money market participants and improve results accordingly.







A footnote:

It does not surprise me that this re-introduction of context and intuition into decision making is made by a woman. According to research papers I’ve seen from Taiwan where almost every adult has a personal trading account of some sort, women perform much better on average than men. Indeed, the student who introduced me to trading laughs at my attempts to trade my plan as I deny contextual awareness. Women have had to rely on “intuition”, i.e., subconscious recognitions of behavioral and communicative patterns to survive. (Remember, women had had their feet bound in Taiwan and were denied the right to vote in the USA into the 20th century.) To survive as an independent and successful woman requires the full use of one’s faculties in social circumstances. Men have the luxury to pursue the comically automatic, I would suggest, only because until recently at least, it has been their world.