Two separate studies interviewing close to 200 successful portfolio managers and traders confirm what Jason Voss and Ravhee Mehta have reported in their books The Intuitive Investor and The Emotionally Intelligent Investor. Being able to read the feelings of other market participants, a form of empathy, and being able to parse one’s one feelings for the difference between intuition and impulse, a specific form of emotional intelligence, are the pivotal skills in long-term market success.

In a world steeped in probabilistic predictions based on numerical analysis, these insights rattle the foundations of many an investor and trader. It’s a bit like finding out the earth is round – adjustments of assumptions are required. It’s not that probabilities and fundamental or technical analyses are irrelevant, it’s that that kind of data is only part of the process. Indications of objective sources of information merge with subjective reactions and unconscious pattern recognition to form the conclusions we come to in our conscious minds.

In fact, as reported in the last blog post, looking at a probability distribution causes the human brain to predict its future emotion. This prediction then colors subsequent analyses. The trick therefore is to become conscious of these thinking events so that as a trader or investor you are accessing the actual data set your brain is using. How do you do that?

  1. Grapple with the idea that your subjective feelings are important.
  2. Learn to listen for what feelings you have.
  3. Give them names.
  4. Put them in categories – intuitive/impulsive or market read/risk management need?
  5. Decide on tactics to avoid acting out the impulsive and risk management ones like fear of missing out.
  6. Trust the intuitive feelings.

The process is like the one of getting better at a sport. You go through the steps and each time (golfing excepted), it gets easier. It involves the mind and the body. It integrates the mind and the body and therefore tactics in number five often involve doing something different with your body. This can be breathing, walking, exercising – anything but staring at the screen! Academics may be able to torture the data until it confesses, traders need to lean back.