Future blindness, Historical narratives.

I've been thinking about making this post for some time now, I've been very interested in recent months in the subject of how poorly we humans are at figuring out the consequences of our actions.  Particularly actions that we've made before, and continue to make, often with similar results. 

These results can be negative or positive, and there can be more than one consequence.  For example, you forget to put the rubbish out on a Wednesday evening, not only do they not pick it up on Thursday morning, but Mrs. Punt is less than impressed!  Perhaps a better example; you didn't get out of that trade when sentiment turned, now you feel stuck on an outcome which is drifting in price and appealing more to your value hunting, punter mentality, rather than the trader's mentality you entered the trade with (more on this example later).

The title of this post might be better phrased as, learning from your mistakes.  But I'm not sure it's quite that simple.  We certainly don't appear to learn as efficiently as we should, so I'm more interested in why, what's stopping us, and how can we make our best efforts to avoid errors or allow for consequences.

Those of you who have read The Black Swan, will recognise the phrases I have used in my title.  He talks a lot about our in ability to think forward, we are "future blind".  I refer you to the Black Swan Glossary, "Future blindness: our natural inability to take into account the properties of the future –like autism which prevents one from taking into account the existence of the minds of others." 

Not only this, it is apparent that we are excellent at adding narratives to the decisions we made in the past.  We try to give reasons why we did certain things, or didn't spot things or certain things happened... We suffer from the narative fallacy, "our need to fit a story or pattern to a series of connected or disconnected facts,"  how can we do this when we weren't even attempting to think ahead?

We wander through life making decisions, on the spot.  Faced with a set of variables, we take a certain direction, we don't generally think of the set of variables this new direction will offer up, and importantly - how likely some of these 'variables' are to crop up and further affect the time line.  Variables can appear in infinite guises, mental, physical, internal, external, out of your control and (if you are lucky) under your control.  In life the distribution of these consequences is random and extreme.  In sports trading - we have a random, extreme sport, and a slightly more mediocre and predictable marketplace to provide an interesting 2 fold puzzle.

Lets make this simple, if you are a trader, your job is to manage exposure to these variables and consequences (and associated probabilities) as best you can.  Why?  Because it is these that decide where you get in and where you get out of your trade.  If you don't make an attempt to quantify consequences, then you are not attempting to figure out your risk and reward, and the probabilities contained within.

I'm not saying you can be precise with your measurement of these consequences, no one knows the true 'value' of things, particularly in the more extreme random part of the equation - the sport you are trading and the participants in the marketplace.  The important thing to take away from this is 'the attempt'.  Merely trying to look for outcomes, both of your own actions and the action taking place in the sport (and their probability) is good enough to provide a framework of learning and future decision making.  Without this, you are confined to providing a best fit narrative, after the event... essentially, you are making up history!  (One has to wonder just how much "history" is actually made up, out of a need to add a narrative to fit what was a random situation.)

And how easy it is to start narrating..  Hindsight is a wonderful thing!  When we know what happened, it is almost always easier to see this outcome as obvious and of a much higher probability than it actually had at the time.  I refer you to Taleb's reverse engineering problem, "It is easier to predict how an ice cube would melt into a puddle than, looking at a puddle, to guess the shape of the ice cube that may have caused it. This makes narrative disciplines and accounts (such as histories) suspicious."

Let's go back to our examples above.  I was going to leave out Mrs. Punt, but then I thought it's quite a good example of how random things can be.  Here is a real life situation with an infinite number of positions and outcomes - an ice cube that could quite literally be any shape.  What caused me to not put the rubbish ('trash' for our American visitors) out?  What distracted me?  What mood was Mrs. Punt in when she came home, what caused that?  How likely was it that she would be in a good mood and not care (much) about the rubbish?  If we didn't realise how random life was, one thing we did know about was the randomness of female emotions!   Perhaps we should swiftly move on to our trading example..

Here we have a classic example of not attempting to think ahead.  I've hinted above that it's important to think of outcomes internally and externally.  Resulting actions of consequences occur on two levels, what happens in the World, and how we react, it's important to try to weigh up the probabilities of both and how they relate to one another, not straight forward, but very worthwhile. 

In our example, what was the probability of our trader changing his mindset to fit the situation?  To figure this out you need to know what situations cause the change, which of these can be altered by a change of strategy and which are vulnerable to the randomness of the market and the event it's based on.   

Obviously there are questions about why they felt the need to change... we'll not concern ourselves with those.  The bigger picture here, is that an attempt by the trader to put a probability on this happening - by assessing the situation constantly, is what will help prevent it occuring, by allowing them to manage their position well enough to minimise it's chance, presuming that they actually find this course of action to be negative...

Which of course, it is.  Changing the term (time scale) of your strategy mid-trade can very occasionally be suitable, but the rest of the time it is back-fitting at it's worst.  You are providing a new narrative to what is occuring to suit some poor trading decisions.  Which is why your assessment of the situation needs to be constant. 

Paul Tudor Jones in his interview in the Market Wizards book said that it didn't matter what price he was long or short from, all that mattered was what the risk / reward was right now, and whether that meant he should be a bull or a bear.  If it agreed with his position then he held it, if not then he closed or went the other way.

A recap.. How can we do our best to avoid future blindness, and our tendency to add narratives,

• Assess the situation on a constant basis, question various scenarios and their probabilities and always keep in mind that the scale of these can vary to an extreme and unpredictable degree.  Nothing is impossible, and many things you think are very low probability are very capable of happening.
• Assessments of event probabilities have a second layer of effect on the market, assess the way the market could react to these and use this to form an idea of risk and reward.  The market is what allows you in and out of trades.
• Remain skeptical about stuff that happened in the past, don't automatically assign a narrative that suits how your trading turned out... once upon a time, this was randomly decided.
• Don't add your own narrative to current events either, this will skew your assessments (avoid matches you think are fixed for example!).
• Keep a record of your attempts at guessing the risk and rewards for various scenarios.  You will only ever see one side of this guess resolved, the other side forms the risk or reward, and is of equal importance for your profitability.
• Constant reassessment takes a lot of mental energy, but gets easier with practice... it can become a habit / instinctual.
• Next time you are making a fast decision, base it on a honed assessment of what might happen and the risk/reward.  If you have time, stop and consider the results of what you are doing, because it's apparent not many of us do this often enough! 
• An important part of not making the same mistake again is looking for it ahead of time, the same goes for any new mistake.

I went through a long period in the last year of not getting anywhere.  When I did my analysis 3/4 months ago, it became very obvious I had simply been repeating the same strategic mistakes over and over again in cycles.  To put a stop to them, you have to first notice them and figure out why you made them, then begin to think ahead.  I realised that I was making the same errors simply because I wasn't watching out for them ahead of time, before long I would find myself in the same corner again, going through the same costly consequence.  I also found I was adding a narrative on the match I was trading rather than looking at what I was doing personally, as well as how the market had been moving. 

Hopefully now you will keep a watch out for the mistakes that I made in your own situations.  Keep your eyes peeled, and get 'back to the future'..  That is essentially what we are trading - 'the future', the future movements of markets and their related probabilities.

Comments

[The Gambler.]

OTOH you could just put the rubbish out. :-).

[Matt]

That was a 'mistake' I am attempting to learn from John! ;) I just need to think ahead.. perhaps a post it note is in order..

[miltos]

Pure inspiration this one:)
Thanks Matt

[Nick]

Hi Matt,

Interesting read, I think your starting up a new sect of Talebfairians at the minute.

Nick

[Graeme Dand]

Mate,

I’ve read this 3 times now and each time, I’ve wanted to write a really smart comment back but to be honest, I’m not smart enough!

Excellent post as usual. Haven’t come to expect anything less from you……

Graeme

[Jimmakos]

Hi!

I wanted to let you know that I'm "Guest Blogging" until the end of August and was wondering if you'd be interested.

Feel free to check my blog's traffic and alexa rank.

Keep it up!

[free bet]

Excellent post - well worth thinking about. Especially the reverse engineering theory which I've come across before but not in this context...
I once actually dreamt a cricket scorecard that came true the next day and have been wondering exactly how I managed to do that ever since. I could open some kind of gambling floodgates. Or not.
Cheers
JK

[Nick]

Any views on the new Betfair 'winners' tax, Matt?

[chaudhary]

nice work well done, i hope every should enjoy this.