Decision Models
I have always been interested in the science of how we as human beings make
decisions. Life is really all about making decisions. If we can improve the way in
which we make decisions, it stands to reason that we will be more successful in
life. If we can improve the manner in which we make our trading decisions, we
will become a more effective trader and hopefully make more money.
In my early years of trading, I always wondered whether there was statistical proof
that strategy trading was inherently more profitable than other types of trading. I
knew from my own experience that it was but I was unable to prove it statistically.
I then picked up a book called Decision Traps. This is a book about the process
3 of decision-making and I picked it off the bookstore shelf when I was attempting
to learn how to become better at trading. I didn’t know at the time that it would
put forth the notion that objective decisions (i.e., strategy trading) produce far
superior results than other non-objective forms of decision making.
In this book, nine different types of decisions were tested using each of the three
different decision methods. The accuracy of the decisions was then compared and
analyzed for effectiveness in predicting final outcomes. The investigator looked at
different types of decisions, predicting grades, predicting recovery from cancer,
performance of life insurance salesmen, as well as predicting changes in stock
prices. He used three different decision making processes: an Intuitive Prediction
Model, a Subjective Linear Model, and an Objective Linear Model. Interestingly
enough, these can be compared to our 3 types of traders: discretionary, technical
and strategy.