Trader Performance Coaching: If its good enough for Wall Street’s heavy hitters, then its good enough for you.

Last week saw the first episode of 'Billions', a major new TV Drama which aired in the US. The programme revolves around Damian Lewis as 'Axe Capital' hedge fund boss Bobby "Axe" Axelrod. One of the other lead characters in this programme is fictional performance coach Wendy Rhoades. At 'Axe Capital' just one session with Wendy Rhoades is all you need to transform your performance. You may spot a little 'dramatic license' being used here; surely one session is far too quick to make a difference to trading performance! Well yes it is. And can a 'Performance Coach' really make such a difference to trading performance? Well actually yes they can, that much is true. 'High quality' performance coaching can make a huge difference to a trader's performance. I know this because as a trader at Commerzbank back in 2001, I was fortunate enough to be the beneficiary of coaching from one of the world's leading performance coaches. My performance as a trader saw a dramatic improvement in the wake of that coachng. And since 2009, I have been working as a performance coach myself with traders, and have witnessed significant transformations in performance amongst traders whom I have worked with.

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'Wall Street’s Heavy Hitters have a Secret: The Performance Coach.' - This line is stolen from an article in today's Guardian newspaper. - Yet despite this,it is still rare to find many traders being coached. Why is this? 

'One of the principal reasons behind why most traders do not work on improving and enhancing their skills and abilities as risk-takers, is because to do so would be tantamount to them admitting they need to.'

There you are, I said it. - Just to repeat - 

'One of the principal reasons behind why most traders do not work on improving and enhancing their skills and abilities as risk-takers, is because to do so would be tantamount to them admitting they need to.'

That is one horrible self-destructive loop! For many traders, admitting they need coaching represents a huge 'Cognitive Dissonance' and would be a major dent to their 'Ego'. In a world where 'self-belief' is almost as vital an asset as real physical capital, admitting that you need help seems like one small step away from destroying that precious 'self-belief'. An example of this features in a previous article which can be seen here. But there are exceptions: Perhaps it is not surprising that so many of the world's top traders employ coaches. Often these people are able to divorce themselves and their trading from their egos. That is one of the characteristics which makes them great at taking and managing risk in the first place. Once you can separate yourself from your ego, at least metaphorically, then instead of saying 'whats wrong with me', you can start saying, 'How can I get better?', 'How can I improve?', 'How can I stay ahead of the rest of the pack?', 'How can I start to move from 'Good' to 'Great'?'.

Moving from ‘Good’ to ‘Great’.

In virtually every other field of human endeavor or skilled profession, people are employing outside help from coaches to help them up-skill their capabilities and abilities.- Elite athletes and top sportsman utilize a coach or even a team of coaches. In the military, ‘Special Forces’ personnel receive extra 'special' coaching. Surgeons spends thousands every year up-skilling. Most senior executives in large corporations receive ‘Executive coaching’.

In our work as coaches we work with traders, investment managers and trading businesses, helping them refine their skills and abilities to help them attain excellence in their trading performance. We see it as equivalent to the transformation elite athletes and top sports-people go through to make that jump to the very top of their game. In trading and investment, the field is the market, the ball is uncertainty, and the enemy is yourself.

Developing ‘Human Alpha’ through powerful Risk Performance Coaching Programmes.

‘Human Alpha’ = The extra return generated through developing stronger human risk-taking skills. Our risk performance coaching and development programmes have been used at some of the worlds leading financial market businesses to help them develop their 'Human Alpha'. Our programmes utilize powerful coaching techniques, and draw on years of experience of working in financial markets and having provided high level coaching. They are further informed by a deep understanding of the behavioural factors which impact trading performance and risk decision-making, and are often supplemented by analysis of bio-metric data and advanced 'mindfulness' techniques for greater focus and concentration.

Overcome your Ego and start considering how Performance Coaching can help you transform from 'Good to Great'.

• First: Remove any negative or defensive thoughts along the lines of ‘Why would I have a coach, there is nothing wrong with me’.
• Second: Dispel any ideas that coaching is something that novices and juniors receive. Juniors receive teaching and training, Those who make it to the top in any field receive coaching.
• Third: Look at it in a positive light: If it is good enough for the big hitters on Wall Street and at Major Hedge Funds, then its certainly good enough for you
• Fourth: Join the success stories: Countless traders and investment professionals who have been through our coaching programmes have seen some huge improvements in their performance. Some examples of which can be seen below:

The Extraordinary 'Returns on Investment' from Coaching for Professional Traders and Portfolio Managers.

In a recent article, which can be seen here, we highlighted the return on investment on our coaching based on feedback received from several of our clients. Some of the examples in this article included:

• A hedge fund portfolio manager who went from virtually flat performance to over almost $50mio in year 1 and beyond that in years 2 and 3.
• An FX bank trader who had been running annually at $2.0 to $2.5mio profit consistently for many years, who increased his p/l to $4mio in the first year of coaching and to over $6mio in the following year.
• A team of 10 FICC traders at a small European bank who had seen their profits as a group jump by $15mio, a significant percentage increase whilst in the same year global FICC trading returns declined by an average of 7%.
• A bank swaps trader, with nearly 20 years experience, who's trading had led to him being at a $2mio loss, but by the year end and with the support of the coaching, had turned his performance around, and in the following year produced his best ever performance.

These examples are not isolated one-offs but are quite typical, we could have included many more. In fact we can draw on outside help by referencing a research piece by Citi Prime Finance, from 2013. This piece highlighted how Hedge Fund firms who focused on the people aspects of performance (Including Coaching) saw average returns some 200bp per year higher over the three year period of research, than other firms who scored far lower in terms of the people aspects of performance. For a mid-size hedge fund with $3bio of AUM, that equates to around $60mio extra income per year.

The benefits of the coaching often goes way beyond the additional monetary gain. Traders display far greater levels of confidence and self-belief, and these are based on real performance capabilities, not self-serving mind-games. They also display greatly improved levels of motivation, as well as lower stress and anxiety levels, and greater job satisfaction. -  For trading businesses, they get far more deeply engaged employees, experience far better team-working and improved collaboration, cultivate stronger client relationships, and see an overall  improvement in risk culture among those coached.

Join some of the world’s leading Trading and Investment business in using our services. 

At Alpha R Cubed we work with many of the world’s leading investment banks and hedge funds, with clients in the US, Canada, throughout Europe, across the Far East, and in Australia and New Zealand. Clients include leading firms such as Bank of America Merrill Lynch, Credit Suisse, Societe Generale, HSBC, National Australia Bank, TD Securities, SEB, Swedbank, Gazprom, ENEL. We also work with several leading hedge funds (though confidentiality precludes us from mentioning their names).

Time for you to make the difference that will make a difference.

To find out more about us and our work, please call  or email us
+44 (0)207 993 5362 / +44 (0)775 344 6097
info@alpharcubed.com

Or visit our website at  www.alpharcubed.com

We look forward to talking to you.

Steven Goldstein
Managing Director
Alpha R Cubed Ltd
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Steven Goldstein is a leading Performance and Executive Coach working with Traders, Banks and Hedge funds: He is Managing Director at Alpha R Cubed, which works with banks and investment firms to improve their human capital within financial risk businesses. To know more about Alpha R Cubed, visit their website www.alpharcubed.com or email Steven at steven.goldstein@alpharcubed.com.

Steven also runs the 'Behavioural Trading' blog and newsletter. - To visit the blog and sign-up for the newsletter, visit http://traderbehaviour.blogspot.co.uk/

Follow Steven on Twitter and Linkedin. Join the flourishing LinkedIn group Trader, Trading & Risk Psychology.

To view our recent Webinar on How Understanding Risk Type Can Impact Trader Performance - Follow this link: http://traderbehaviour.blogspot.co.uk/2016/01/how-understanding-risk-type-can-impact.html

How Understanding Risk Type Can Impact Trader Performance - Webinar Recording.

Thank you to all those who joined our Webinar on Thursday 21st January about 'The Risk Type Compass', Risk Personality Assessment Tool. A recording of the Webinar is now available and can be seen on the video below.


The Webinar is around 55 minutes long is in three parts:

Part 1 : Up to 14 Min 45 Seconds. - . Geoff Trickey talks about the Risk Type Compass Tool and the Theory and Science behind it. Geoff Trickey is Managing Director of 'Psychological Consultancy Ltd (PCL)' and creator of the Risk Type Compass Tool.

Part 2 : 14 Min 45 Seconds through to 44 Min 20 seconds - Steven Goldstein talks about how he uses the 'Risk Type Compass' in his coaching and development work with professional traders and portfolio managers. Steven also shares some of his and his colleagues own private research conducted on the trader personalities of professional traders at investment banks and hedge funds, and what it means for risk-taker performance. Steven Goldstein is a leading Trader & Portfolio Manager Performance Coach and Managing Director of Alpha R Cubed.

Part 3: 44 Min 20 Seconds through to 55 Minutes. Q&A session. 
 



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To know more about Alpha R Cubed, visit their website www.alpharcubed.com or email Steven at steven.goldstein@alpharcubed.com.

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Dennis Gartman’s Timeless “Rules of Trading”, with added emphasis.

1.   Never, under any circumstance add to a losing position.... EVER, EVER! Nothing

more need be said; to do otherwise will eventually and absolutely lead to ruin! - (Just to add a little extra emphasis, you will occasionally break this rule, and it will seem ok, it may even go right several times, but there is one time it won’t, and that time could kill you. – Remember ‘You only die once’.

2.   Trade like a mercenary guerrilla. We must fight on the winning side and be willing to change sides readily when one side has gained the upper hand. (There is nothing wrong with switching from bullish to bearish and vice-versa,’ there is everything wrong with being stubborn’).

3.   Capital comes in two varieties: Mental and that which is in your pocket or account. Of the two types of capital, the mental is the more important and expensive of the two. (Risk Management is vital, but at least equal is self-management; learn to walk-away, ‘you can always fight another day’). Holding to losing positions costs measurable sums of actual capital, but it costs immeasurable sums of mental capital.

4.   The objective is not to buy low and sell high, but to buy high and to sell higher. We can never know what price is "low." Nor can we know what price is "high." (Don’t be afraid to buy what you worry may be a top, it may soon be a long way from being the top. This is a check on worrying about looking stupid, in truth ‘no one else really cares’, remember that!)

5.   In bull markets we can only be long or neutral, and in bear markets we can only be short or neutral. That may seem self-evident; it is not, and it is a lesson learned too late by far too many. (Fighting trends saps a lot of mental energy, see 3 above).

6.   "Markets can remain illogical far longer than you or I can remain solvent." Courtesy of the inimitable John Maynard Keynes. - We like to believe the market is full of people making rational logical decisions, think again most of them are reacting to emotional impulses. (See our ‘Chimp Paradox article’ for some further elaboration.) 
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      Beyond the Hype: The 10 Behavioural Traits of Highly Successful Traders.

      Read the article here: LinkedIn Version.  

      For Blog Version Click Here

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7.   Sell markets that show the greatest weakness, and buy those that show the greatest strength. Metaphorically, when bearish, throw your rocks into the wettest paper sack, for they break most readily. In bull markets, we need to ride upon the strongest winds... they shall carry us higher than shall lesser ones. (Such good advice, but so rarely heeded.)

8.   Trading runs in cycles: some good; most bad. Trade large and aggressively when trading well; trade small and modestly when trading poorly. In "good times," even errors are profitable; in "bad times" even the most well researched trades go awry. (This is very much about being in the zone, and hammering the advantage when you can. It takes experience to get this one right)

9.   To trade successfully, think like a fundamentalist; trade like a technician. It is imperative that we understand the fundamentals driving a trade, but also that we understand the market's technical’s. When we do, then, and only then, can we or should we, trade. (Personally, I don’t fully subscribe fully to this one, but then who am I to question it.)

10. Keep your technical systems simple. Complicated systems breed confusion; simplicity breeds elegance. In other words ‘Less is often more’, and ‘Simplicity is beauty’

11. An understanding of mass psychology is often more important than an understanding of economics. Markets are driven by human beings making human errors and also making super-human insights. (Quite possibly the most undervalued piece of advice, refer again to the ‘Chimp Paradox article, markets are not being moved by thousands of Dr Spocks, but rather by the impulsive whims of herding mammals and battling tribes.  

12. Bear markets are more violent than are bull markets and so also are their retracements. (In a bear market everyone flees for the exit at the same time, liquidity is not guaranteed in these times.)

13. Be patient with winning trades; be enormously impatient with losing trades. Remember it is quite possible to make large sums trading/investing if we are "right" only 30% of the time, as long as our losses are small and our profits are large. (Advice as old as the markets themselves.- Heed it)

14. The market is the sum total of the wisdom ... and the ignorance...of all of those who deal in it; and we dare not argue with the market's wisdom. If we learn nothing more than this we've learned much indeed. (In other words ‘the market is always right’, it is never wrong, but you are, often.)

15. Do more of that which is working and less of that which is not: If a market is strong, buy more; if a market is weak, sell more. New highs are to be bought; new lows sold. (A variation on points 4 and 7 with an added twist, just shows how important this is).,

16. The hard trade is the right trade: If it is easy to sell, don't; and if it is easy to buy, don't. Do the trade that is hard to do and that which the crowd finds objectionable. (If you are buying, and everyone else is long and buying, then soon who will be left to buy, there is probably not much upside left: This takes skill to get right, but the successful have normally perfect it. )

17. 'There is never one cockroach!’ This is a late addition to Gartman’s timeless rules. – (I love this phrase, write it down somewhere visible and keep reminding yourself about this.)

Good luck. Trading is never easy, only very few make it through boot camp. If they have its likely they have adhered too many of these rules.  There is one other rule however, which every great trader somehow manages to achieve: I don’t recommend trying it until you are way past bootcamp. It is this one: ALL RULES ARE MEANT TO BE BROKEN: But they are to be broken only rarely and true genius comes with knowing when, where and why!

Steven Goldstein is a leading Performance and Executive Coach working with Traders, Banks and Hedge funds: He is Managing Director of at Alpha R Cubed, which works with banks and investment firms to improve their human capital within financial risk businesses. To know more about Alpha R Cubed, visit their website www.alpharcubed.com or email Steven at steven.goldstein@alpharcubed.com.

Follow Steven on Twitter and Linkedin. Join the flourishing LinkedIn group Trader, Trading & Risk Psychology. 

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Self-Awareness and Understanding your Risk Personality, Why it Matters for your Trading and Investment Success.

One of the main themes which runs through my recent post, 'The 10 Behavioural Traits of Highly Successful Traders & Investment Professionals' is that traders who display these behavioural traits tend to possess extraordinarily high levels of self-awareness. In my work as a performance coach, I find that far too many traders and investment professionals possess inadequate levels of self-awareness. I will put my hand up and state for the record, that for the first 15 years of my trading career, I was one of those traders. This meant that I was OK as a trader, but never big league. - I was fortunate however that I was given an opportunity by a far sighted manager who sent me to see top trading coach Peter Burditt. This experience elevated my own levels of self-awareness well beyond anything I had previously known, and was to have a powerful transformative affect on my trading.  

The above quote by Sun Tzu captures the point about self-awareness extremely well. Most traders possess strong knowledge about 'the enemy', their market, however they tend to suffer a dearth of knowledge about themselves. On the contrary, traders that possess high levels of self-awareness are the ones winning their battles.

I recall a coaching session with a trader from an investment bank in Hong Kong. Prior to the coaching I had been provided with some background by his manager. He was a very strong performer with an excellent track record. When the individual entered the room for our first meeting, I was somewhat underwhelmed as this rather unassuming slightly diminutive person entered the room. However within minutes of talking to him, I realized that this individual was actually one of the smartest most self-aware individuals that I had ever come across. As it turned out, not only was this individual an outstanding trader but he was also ranked in the world's top-200 poker players. Quite an achievement for a full time bank trader.

How Self-Awareness Makes You More Effective as a Trader and Investment Manager.
Self-awareness helps you understand more about your innate skills, your capabilities and your blind-spots. The self-aware trader is able to plug skill and behavioural gaps in their trading and risk activities and promote development of key skills. Self-aware traders direct their energy toward situations in which they will be most effective. In these situations, they are more likely to have an edge, which means they more likely to be able to exercise better intuitive decision making, will suffer less stress and will be more motivated.

 

Knowing your strengths and weaknesses: Self-awareness helps you exploit and leverage your strengths and better manage your weaknesses. A trader who is aware that they are strong at certain times or in certain situations can direct their energy to when those times and situations present themselves. This can lead to greater confidence in themselves to execute at the right time, and may enable them to be willing to risk a greater size. Equally a trader who is conscious about their weaknesses can start to take action to address this, either by working on their weaknesses or avoiding those situations where their weaknesses come to the fore. On the other hand, the less-self-aware trader is more likely to find themselves trading when they shouldn't and failing to capitalize on situations when they should. This leads to lower levels of confidence, excuses for a failure to act, and repetitive and self-defeating behaviours.

 

Acting Intuitively: Traders with well-developed emotional self-awareness are often highly effective intuitive decision makers. In complex situations, such as financial markets, where there is high levels of uncertainty and too many unknown variables, highly intuitive decision makers are able to process large amounts of sometimes unstructured and ambiguous data, and choose a course of action based on a "gut feeling" or a "sense" of what's the best option. Traders who are highly emotionally self-aware are able to read their "gut feelings" and use them to guide decisions, whilst regulating and managing their own emotions.

Stress avoidance’ or ‘Stress Reduction’: the self-aware trader is more likely to adopt methods or approaches which suit their personality. Approaches and methods that don't suit your personality tend to give you more stress. Equally engaging in practices, tactics and strategies which are incompatible with your personality or character, are likely to lead to stress and sub-par performance. This is not to say that you should never engage in behaviours that conflicts with your personality. However, like writing with your left-hand if you are right handed, it will take a longer to develop competency and you are always likely to have to work extra hard to develop the skills you need for success. It is far better to align your methods and approaches to ways which may be less stressful for you. In my work I use a risk-profiling tool that categorizes all risk professionals into one of eight different types of risk personality (See example below). There are certain behaviours and types of trading which appear to be incompatible with each risk type. For example the ‘Wary’ risk type is highly risk averse, they tend to be prefer shorter-term trading are highly tactical in their approach and typically like to use stops. On the contrary traders who fit the ‘Adventurous’ type are diametrically opposite the ‘Wary’ type, they are less analytical and more big-picture thinking, they tend to prefer a strategic longer-term approach and often like to fade the market. We have worked with many ‘discretionary’ traders of both types. Success is not necessarily more likely to be found among any particular type, what matters to success is that they are matching their style and approach to their type. Indeed the most successful individual, out of all the traders we have worked with thus far since we started testing our clients just over a year ago, is a ‘Wary’ type individual who is incredibly risk-averse. He has found an approach and style which suits his cautious risk-averse approach, and as a result has made over $100mio for his hedge fund in each of the past two years. 

 
Motivation: Raised levels of self-awareness can have a profound effect on  levels of motivation. A trader who feels helpless can become easily demotivated, however a trader who suddenly understands why they do the things they do, and can start do something about it starts to feel far more motivated. It's very difficult to cope with poor results when you don't understand what causes them. When you don't know what behaviours to change to improve your performance, you just feel helpless. Self-awareness is empowering because it can reveal where the performance problems are and can indicate what can be done to improve performance.

Leadership, Management and Team Performance: Self-awareness is also a powerful attribute for leaders. When we understand "what make us tick" we have the insight to understand what makes others tick. To the extent that other people are like you (and, of course, there are limits to the similarity), knowing how to motivate yourself is tantamount to knowing how to motivate others. Strong manager, lead strong teams. Understanding the drivers of the members of the team can help optimally distribute resources around the team. Too many of members of the same type within a team can lead to ‘concentration risk’, whereas diversified skill-sets working in harmony can drive team performance forward.

 

Our coaching at AlphaRCubed is highly empowering to traders, because one of the key aspects of our work is to help raise people’s self-awareness. Our coaching has achieved some extraordinary outcomes in helping traders and investment professionals breakthrough performance ceilings, as was featured in this article here. No one truly knows themselves because, as Daniel Kahneman puts it, ‘We are all blind to our own blindnesses’. Our coaching provides objective feedback to individual, in a risk and financial market context. The reason this is so powerful with traders and investment managers, is not because the coach is smarter or has a better understanding of the job than the individual. Rather it is because the traders, being so much inside their own mind and the system they operate within, don’t question themselves in the way someone with an external perspective does. Being outside the system and getting an alternative perspective, helps people to see themselves as they’ve never seen themselves before. It is this, when done effectively, that helps the individual being coached achieve far greater levels of self-awareness. If you need not fear the results of a hundred battles, how much more ready will you be for the fight.

Arguing for the importance of self-awareness, Socrates famously taught that ‘the unexamined life is not worth living’.

To know more: 
 

If you would like to find out how our powerful Trader and Investment Professionals Coaching programmes can help develop greater self-awareness and improve your trading performance, please visit our website www.alpharcubed.com/coaching. Or we would be happy to schedule a call with you, please email me Steven Goldstein at steven.goldstein@alpharcubed.com to arrange this. We work with clients across the globe, and from all product and asset classes.

Steven Goldstein is a leading Performance and Executive Coach working with Traders, Banks, Energy Firms and Hedge funds: He is Managing Director of at Alpha R Cubed, which works with banks and investment firms to improve their human capital within financial risk businesses. To know more about Alpha R Cubed, visit their website www.alpharcubed.com or email Steven at steven.goldstein@alpharcubed.com.

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Killer Biases:‘Cognitive Dissonance’ an Inconvenient Truth.

Dennis Gartman’s timeless trading rule Number 3 states that ‘Capital comes in two varieties, mental and that which is in your pocket, and that of the two 'mental' is the most important and most expensive’. Mental capital is so difficult to control and manage because our brains and minds do not work in the way we like to think they do. In a perfect scenario, they would work to make rational and sound decisions, where pros and cons are perfectly weighed up, and outcomes considered and actions taken. However, the reality is very different: Our minds and actions, are swayed, cajoled and derailed by different internal and external push and pull factors. These factors heavily influence the way we think, decide and act. Factors which distort our thinking includes biases, emotions, ego, mental blind-spots, human biological limitations, our relationships with other people, and how we act and conform in social situations. 

The field of behavioural finance has emerged over recent years as a way of studying these many different factors. It looks to provide greater understanding of how they impact our decision making, how this affects our actions, and how this impacts they way markets behave.

One of the major areas of interest for Behavioural Finance is human biases; distortions in our thinking often cause us to act in less than rational ways. One of the most impactful of biases on our behaviour is 'Cognitive Dissonance', this is a term which is best summed up as how we cope when faced with 'Inconvenient truths'. When this happens we find ourselves compromised; sharing two differing or opposing beliefs which makes us feel extremely uncomfortable. This becomes more challenging the more we have emotionally staked on it. In these situations we may perform far-reaching rationalizations in order to avoid the discomfort connected to ‘Cognitive Dissonance’. Typically we come down on the side of our initial or invested belief, only changing sides, if at all, when there is overwhelming evidence against us. 

People will go to great lengths to convince themselves that a decision they made was the right decision:

In trading and investment, people live and die by the decisions they make. 'Cognitive Dissonance’ is one bias, which can seriously handicap the quality of these decisions.  Traders and investment professionals, whose perceptions are skewed, will not read the markets objectively and will not act or react rationally to new data or news. Inconvenient truths make people highly selective in terms of their analysis of markets, and leads to sub-par choices based on flimsy foundations. 

A simplified example of cognitive dissonance from my own experience.

A few years ago when charges were brought against Lance Armstrong by the US anti-doping agency, I found it difficult to accept. Armstrong had long been one of my heroes having fought and overcome a prolonged battle with cancer to achieve incredible success in the world of cycling. I had invested a lot of time and energy in being a huge Armstrong fan, I read his books, watched anything on the TV about him, and sang his praises to all and sundry. Thus when this new evidence was presented about his cheating, I found myself extremely challenged, I was suffering from two opposing beliefs in my mind.

Belief 1) Lance Armstrong is one of my all-time great sporting heroes and a living legend.

Belief 2) Cheating is wrong, and I despise anyone who cheats.

These two opposing beliefs occurred together in my mind, either Armstrong was a hero of mine, or a cheat. At first, I found myself defending Armstrong: ’They must be wrong’, ‘They always had an agenda against him’, ‘What was he supposed to do, everybody else was doing it.’. The fact that Armstrong had been found guilty of cheating was an 'inconvenient truth' too far for me. What was occurring what that I suffered a ‘Cognitive Dissonance’, and as a result I tried to find rationalizations and justifications to resolve it.

Cognitive dissonance seriously impacts trading and investment performance. 

In trading and investment situations, and in any role where high level decisions-making is required, such as management,  'Cognitive Dissonance' can seriously impact a persons performance. Whilst in many cases the effects will be relatively trivial, there will be many more serious examples. 

Consider this, you have taken a bearish view on US stock. The market has been on a tear for many years, and you are starting to think that it is well overvalued. The global economy is weak, the banks are still a mess, China is about to blow up, etc, etc. You've read this bearish analyst, and that bearish report, you are convinced that the world is going to hell in a handbasket. So you sell your stock portfolio, you buy puts in the SPX, and maybe decide to sell some DAX to just to spread the joy. But then the world does not collapse, far from it, the market carries on roaring higher, as it has done so for many years now. You are heavily invested however in this position, both personally and mentally. you convince all around you that the world is doomed, you call it a fools rally, and feel that the top is even closer now.  - Who knows, maybe yo will be right, but you are now fighting reality, the market is again on a tear, and you are hurting. - Not only are you losing money, but you are on a wrong call. Now, the data is starting to come out better, oil prices are falling, taking some of the pressure off the economy, Chinese and US data are surprising marginally to the upside, the FED is talking easier money for longer, and other central banks are playing ball. But you don't see it, or you refuse to see it more like. - And so the pain goes on, and so the market goes higher, and so your account dwindles. This is what Cognitive Dissonance does, it divorces you from reality and objectivity.     

However there is another damageing aspect to 'Cognitive Dissoannce', which is just as, if not more harmful over the longer term, but which is not obvious at the time. 'Cognitive Dissonance' stops you from learning from your errors. The consequence of this is that it curtails your development and leads to you repeating the same mistakes. In fact this affect becomes all the more insidious the more mature one gets. During a traders formative years, they are likely to have individuals, managers and mentors who are pointing our their faults, or reproaching them when they make mistakes. However as individuals mature in their role, they are less likely to get this feedback and support. On one's own, it can be incredibly difficult for people to recognize that they face a 'Cognitive Dissonance', let alone to resolve it in a balanced and objective way.

This is one of the reasons why it is so useful to have a third-party perspective from a neutral party. This is one of the reasons why the coaching work I do with traders and investment managers is so powerful. In my coaching I often come across many traders who were displaying some form of ‘Cognitive Dissonance’ that has been negatively affecting their performance. The Behavioural Performance Coaching starts working with the trader to help them impose their 'Cognitive Capabilities' and become more conscious of how and when their behaviours are potentially derailing their performance. The coaching helps traders channel their energy more effectively toward making money, and monetizing risk. 

An example of how 'Cognitive Dissonance' impacts trading and investment.

In trading and investment, people are constantly trying to bring some semblance of certainty to the world of the highly uncertain. However, financial and commodity markets are by their nature, inherently uncertain. Thus the one thing that is certain is that often you will be wrong. However, as well as being highly damaging to a trader’s ego, being wrong can be extremely hard for people to deal with. This often leaves people caught in a state of ‘Cognitive Dissonance’. 

Belief 1) I am good at my job, and deserve the rewards that come from being a trader.

Belief 2) I was wrong, how can I be any good at my job.

Adding into the mix, ‘Belief 1’ underlies ‘self-belief’, ‘self-confidence’, and ‘positive outlook’, which are all valuable attributes in the daily battle with the markets.

Faced with this dilemma traders may make many excuses or might come up with what appear as valid justifications for their actions. –‘Anybody would have done the same in the circumstances’. They may blame someone else or other parties. - ‘Others must have had inside information,’, ‘That research report was rubbish’. Or they may just act dismissively of it. And with that they move on, no lesson learned, no reviewing what they could have done differently or better, and thus the seeds are sewn for a future repeat. This is what ‘Cognitive Dissonance’ does, it shuts you off from reality, it closes your mind, you lose objectivity, and thus you do not learn from your mistakes and are doomed to the repeat them. At its most serious, sub-par behaviours can become entrenched ways of thinking, and when that happens, the outcome is rarely good. 

What other approach could a person take when faced with Cognitive Dissoance?

‘Cognitive Dissonance’ is often an ego defensive action. In the Lance Armstrong example, I had mixed up my ego with my admiration for Armstrong, as such I was really defending my ego. In the second example, the trader would also have been defending their ego. Being wrong can make a trader feel stupid, embarrassed, humiliated. They may feel their reputation is at stake. Of course in reality, no one cared that I was a fan of Lance Armstrong, and if they did – ‘So what!’ – Likewise with the trader; who cared that the trader was wrong. In trading, everyone is wrong sometime, that is the nature of risk and uncertainty. If a trader can start accept this and understand this, then suddenly losses are not so threatening. Suddenly being wrong is not such a bruising event for the ego. If you can accept that you will be right and wrong often when trying to achieve a positive return overall, then it becomes easier to accept. Once you can take this attitude, you can look at your work, and start to consider if there was anything you could have done differently. If you can examine your trades and your processes, then perhaps you can see what you can do better or differently next time. Perhaps next time when you are wrong it will be less damaging, and perhaps when you are right maybe you will able to squeeze that bit much more out of it, and in the end, those small changes can make a very big net difference.

The theory of Cognitive Dissonance is a fascinating topic which arises often in discussions with traders and investment managers as part of the performance coaching. For further reading I would suggest two excellent books. 'Mistakes Were Made But Not By Me' by Carol Tavris and Elliot Aronson, and 'Black Box Thinking, the Surprising Truth about Success’ by the excellent Matthew Syed.

Finally: I did end up resolving my ‘Cognitive Dissonance’ with regard to Lance Armstrong, I accept he was a cheat and a liar. However, it took me some time to come around to accept that. I first wrote a blog about ‘Lance Armstrong and Cognitive Dissonance’ back in 2012, the article can be seen here. What is interesting is to look at the final sentence in that blog, ‘Judging by the numerous articles I have read since Armstrong announced he would not be fighting the claims, I do not think I am alone; he still seems to be held in great esteem, if just a little tarnished’. It is clear that at the time I was still struggling to resolve my dissonance.

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