Embrace Trading Failure and Black Box Thinking

Black Box thinking by Mathew Sayed outlines two major industry approaches to learning. The airline industry’s ability to systematically learn from its mistakes. The medical industry has a history of cover-ups and failing to learn from errors. I use these examples as an analogy to trading. 

• Elite traders have more in common with the airline industry’s attitudes towards learning, whilst inexperienced and newer traders align with medical thinking and attitudes towards education. 

The fundamental difference between these two professions makes the difference between winning and losing consistently. As traders we should learn how to embrace failure and learn from the experience.

Learning from mistakes

Experienced traders embrace the ‘Logic of Failure’. Markets constantly give them plenty of feedback through their trading statements, a feedback loop that doesn’t lie. There are two types of feedback loops ‘closed ‘and ‘open’. Pilots (good traders) use an ‘open’ loop where failures are embraced, analysed, and the experience learned from. 

Doctors (aka weaker traders) use a ‘closed’ loop. A closed loop is where failure is not recognised, and errors are repeated. Weaknesses are misinterpreted and or worse still, ignored. In trading, this can be easily done. A poor trade is forgotten after a long day. The winning trades live long in the memory, and there is no active system to record what is working and what is not. These behavioural failings lead to issues called Cognitive Dissonance. 

Cognitive Dissonance-You are lying to yourself

Cognitive Dissonance is prevalent in many new traders’ behaviour, and the whole topic and blog onOvernight Session More its own. We use it to hide and cover up failures, so no learning takes place. Truth hurts, goes the cliché! 

When confronted with evidence that challenges our beliefs, our minds tend to play tricks onOvernight Session More us and make rational explanations out of thin air for our mistakes. Doctors also don’t like to own up to mistakes. It makes them vulnerable to their peers and ego. Does this sound familiar?

Progress, in large part, comes from our willingness to learn from failure. Traders who talk a good game and whose egos are bound by their predictions and outcome are most likely to reframe their mistakes and fail to learn from them.

Pilots and experienced traders, onOvernight Session More the other hand, have an open loop where at a collective level, there is an ethos of learning where the best lessons are from our mistakes. The more we analyse and track the ‘error signal’ (i.e. timing, sizing, entry exits etc and the frequency), the better we can understand their cause and effect. Then use that learning for whittling them out over time. 

Practice

One other feature is that pilots practice practice practice! Learn onOvernight Session More the ground, not in the air. They test their ideas in a continuous reiterative structure, identifying and improving. Never accept the status quo. Pro traders will still use a demo to test new strategies or run over ideas over multiple scenarios.

Avoiding failure in the short term is an inevitable outcome: we lose bigger in the long term! Just learn and bounce back.

CREATE A GROWTH CULTURE

Regard failure as a learning process, trust in the power of process over improvisation. Difficult times come to everyone, and how we choose to learn and adapt in a typical Darwinian fashion dictates if we survive and thrive or dwindle and die. 

Have a deep learning process and embrace failure of all kinds as a learning opportunity, your motivation and self-belief are not threatened by it.

Fear of being wrong and the desire to protect the status quo are particularly strong, mistakes can persist in plain sight almost indefinitely. Admit to a minor flaw now/today to avoid admitting to a much more threatening one later. Embrace your failure and use that as a powerful growth tool.

Here are some fantastic quotes from the book. They are also great tips that I try to live by. 

“Learn from the mistakes of others. You can’t live long enough to make them all yourself.” ― Matthew Syed

“The reason is not difficult to see: if we drop out when we hit problems, progress is scuppered, no matter how talented we are. If we interpret difficulties as indictments of who we are, rather than as pathways to progress, we will run a mile from failure. Grit, then, is strongly related to the Growth Mindset; it is about the way we conceptualise success and failure.”

 ― Matthew Syed

One Last Thing

“The difference between science and previous ways of trying to find out truths is, in large part, that scientists are willing to test their ideas because they don’t regard them as infallible… You have to put questions to nature and be willing to change your ideas if they don’t work”. –Matthew Syed

TRADE WELL AND PROSPER

BT