It is often said that system traders spend too much time attempting to perfect entry and exit points. What if we expand that idea and take a look at whether or not we are putting too much effort into all of our trading efforts?
There is more to be learned from actually trading than is taught in classrooms. You can trade successfully right now, despite the fact that there are thousands of people who have more knowledge than you.
When Two Things Are Not “The Same”
In Book IV of Antifragile, Nassim Taleb spends a good portion of the chapters addressing the lack of actionable knowledge that can be gained from institutional learning. He strongly advocates a self-directed style of learning as opposed to the standard university approach.
As systematic traders, we are forced to follow the self-directed approach that Taleb mentions because systematic trend following strategies are not taught in expensive universities.
“When you are fragile you need to know a lot more than when you are antifragile. Conversely, when you think you know more than you do, you are fragile (to error).” – Taleb
Taleb uses both the Halo Effect and The Green Lumber Fallacy to illustrate his point that knowledge about a topic does not necessarily lead to success in that field. In trading, it is popular to discuss why markets behave in different ways.
This need to understand why something happens increases fragility. In order to make our trading systems more antifragile, we must focus less on what we know and more on what we don’t know. We don’t know the future.
“The more interesting their conversation, the more cultured they are, the more they will be trapped into thinking that they are effective at what they are doing in real business (something psychologists call the halo effect, the mistake of thinking that skills in, say skiing translate unfailingly into skills in managing a pottery workshop or a bank department, or that a good chess player would be a good strategist in real life). – Taleb
The most commonly used example of the halo effect, which was first researched by Edward Thorndike, occurs when our opinion of someone’s character traits are influenced by their attractiveness.
The halo effect applies well to brand marketing. The amazing popularity of Apple’s iPod has resulted in great success for many of its other products. I personally have experienced this effect with Apple products.
After being a long time iPod user, I purchased an iPad a few years ago and was completely blown away. My enthusiasm for the iPad convinced me that I next needed to acquire an iPhone. Six months later, I was the proud owner of an iPhone 4S, which has a woman inside of it that talks to me. Now that I had an iPod, iPad, and iPhone, the decision on what kind of laptop to buy was already made for me. I wanted a MacBook Air.
While the halo effect worked out nicely for Apple, Taleb suggests that it increases fragility. In the last part of the quote above, he compares the skill of playing chess with real life strategy. The obvious connection to trading is that knowledge about trading does not translate into profitable trading.
An extensive working knowledge of the Black Scholes Model will make you sound intelligent at a dinner party, but there is a lot more that is needed to actually trade options successfully. A trader with far less knowledge can benefit simply by not over thinking his trades.
He is free to experiment with trial and error the way Taleb suggests. The learn as you go approach is far more antifragile. This is how the Green Lumber Trader operates.
The Green Lumber Fallacy is a reference Taleb makes to a commodity trader who traded “green lumber” successfully, even though he didn’t know why it was called that. The theory behind this example is that the information that is generally associated with a market may have little to no bearing on that market. Taleb also gives an example of a Swiss franc trader who “could not place Switzerland on the map.”
“So let us call the green lumber fallacy the situation in which one mistakes a source of necessary knowledge – the greenness of lumber – for another, less visible from the outside, less tractable, less narratable.” – Taleb
Again here, we see success coming more from the lack of knowledge than an abundance of it. This idea reminds us that many of the issues and strategies discussed on television simply have no bearing on our trading results. Rather than drowning ourselves in data, the correct way to build a successful system is to look at less data. Less truly is more.