Charlie Munger – Cognitive Biases – Inconsistency-Avoidance Tendency

We tend not to behave in ways that are inconsistent with the beliefs we hold about ourselves.

Be careful about the beliefs you take on. We talked about this briefly in regards to integral theory with the post on Types.  Do you type yourself?  Do you read the attributes of the Cancer Astrology Symbol and take on those traits.  Do you read what successful traders do and label yourself as a successful trader?  According to a simplistic view of this bias, you would not behave in a way that would be inconsistent with a successful trader IF YOU TRULY believed you were. In my opinion, this is where it gets interesting.

We have the explicit and implicit selves and I believe we mainly have the tendency to avoid inconsistencies with the implicit self.  Let’s give an example. Ben tell everyone he wants to be a famous painter one day (explicit). However, even though he truly does want to be a famous painter his true belief is that he can’t.

When you talk to Ben he is vibrant, communicative and deeply passionate about painting.  He talks about all the things he could do and what he would do.  However, he goes home and watches T.V. Ben does not practice his craft of painting.  Why the discrepancy?  He truly does want to be a great painter at his core.  Here is where the bias comes in.

His core belief is that he can’t become a famous painter. So he acts according to that belief. He watches T.V. He hangs out with friends and avoids painting at home.  the implicit self, in my opinion, rules the day.

This bias also works on the positive side of things. If I believe myself to be a good person and I’m put in a position to question that moral, say by having to donate money to an animal charity. I am likely to donate. We all are.

In factor analysis, this is called the discrepancy function. It’s the difference between the original matrix and the reconstructed one.  I believe as human we work to minimize this function as best we can whether it helps us or hurts us.

How to Keep a Trading Journal

The Easiest Way to Keep a Trading Journal – A Great Trading Tool. Trading Journals are critical to all traders development. Learn how to keep one properly and easily with integral theory.

Keeping a trading journal is a critical aspect of becoming a good trader.  You’ll never know what you did wrong unless you can objectively witness the prior trades you took; good or bad.  Then the next question becomes well once I’ve witnessed my profitable trade or error how I avoid it again?  We’ll chat about that in another blog called “How to practice trading.”

There are so many ways, tools, and programs that will help you keep a journal but if you are like me none of them really stuck or worked well for my day trading style.  After all, who has time to spill all their emotions, intuitions, and thoughts while trading?! Not to mention market conditions, entry & exit prices and who else knows what information may be relevant to your style.  To me text is dead in this case. It’s too slow and you have more important things going on than talking about your stupid feelings. 🙂

We are going to draw on integral theory’s quadrants to establish a methodology that will allow us to focus on all aspects of the trade.  You can do this with pictures, text or video.

How to create a trading journal.

Upper left Quadrant: What were the intra-day fundamentals. Essentially why were you looking at this stock? Did you get an alert? Did you see if pop up because of a signal from trade idea? Did your algo say, “buy here.”  Did they release earnings? Did they get an upgrade?   These are some examples of the interior aspect of a trade.  Think “why am I trading this stock.”

Upper Right Quadrant:  Essentially we are talking about Technical analysis.  Did it come into a supply zone? Did it make a head & shoulders top? Did it have a candle stick pattern you liked? Objectively, what was this stock doing? Chopping? Trending? etc

Lower Left Quadrant: This is where it can get tricky this quadrant is about shared meaning/value. An example of this is language.  I interpret this now as the sentiment of the stock.  What do WE, as a collective, believe about this stock? What do WE as a bull (or bear) believe about this stock?

Lower Right Quadrant:  Intersubjective.  Economic systems fall into this category, so would a mechanical failure on the stock exchange.  It can also be interpreted as: What was the market doing? How did the SPY or Oil or whatever market gauge you like to use, perform with your stock? What artifacts were left behind? Do you see a stream of red candles of green?

This would Look like the following:  You can either download a program like Greenshot to capture pictures from your screen and edit them (this is a free version of snagit) or write in a journal when you want. Displaying the picture will give you the best idea of how to review your trades using integral theory and create the trading journal that will hopefully make you a better trader.

Remember you want a journal that will cover all aspects of why you did what you did without taking up loads of your time.  You need the best information and I believe integral theory helps focus us to pull only relavent information.

As I continue my study of Integral theory by Ken Wilber my understanding of it changes.    This is, according to my understanding, is the first attempt to understand finance in an integral frame work.  This is Integral applications In finance.