Dorn: Are You Making These Trading Mistakes?

Friday, 22 May 2009 | 1:14 PM ET

It is one thing to show a man that he is in an error, and another to put him in possession of truth...John Locke

Cognitive biases describe the way you think - the operative words here being cognitive (thinking) and biases (prejudices). You tend to hold on to your biases, even when they don’t serve you well.

This causes you to make trading mistake after trading mistake. Also, since your brain is hard-wired for biases, it is difficult to change them without experiencing some type of internal discomfort.

Resistance to change and acting out of biases have two effects on your trading and investing: You do the same thing over and over again, and you expect different results every time you do it. This is - as you are aware - Albert Einstein’s definition of insanity.

In order to push through the biases that are holding you back from becoming a profitable trader and investor, you must be aware of them and make appropriate changes. How do you make changes? You retrain your trading brain. This is done through consistent coaching and practice. It takes time, but it is completely doable—and it works!

The human brain uses biases to protect against assaults on your self-esteem. The self-attribution bias describes the tendency for good outcomes to be attributed to skill and bad outcomes to be attributed to just plain hideous bad luck.

A decision matrix for self-attribution bias looks something like this:


Right Reason Skill Bad Luck
Wrong Reason Good Luck Mistake

This type of thinking is one of the biggest obstacles you must push through in order to become successful. Why? Because the only way to gain consistent profitability as a trader is to recognize and take full responsibility for your own mistakes. This is yet another reason to keep a detailed trading journal and to analyze each trade in context of self-attribution. In this way, you will come to a better understanding of where you were skillful and where you were lucky. You will also find that mistakes are essential to learning—both in the markets and in life. The takeaway is to accept a mistake as a mistake, not blame anyone else, and learn from it so as not to make it again.

Here are some questions for you to ponder as they pertain to self-attribution bias and how it is interfering with your trading success:

1. When are you lucky and when are you skillful?

2. Are you right for the "right" reason, or are you right for some other reason?

3. Does it matter, as long as you are right?

4. How do you measure and "fess up" to mistakes—i.e., recognize mistakes as mistakes by taking personal responsibility and accumulating regret?

5. Is it important to do this, and why or why not?

6. What are some other biases that affect your trading results?

You should examine yourself daily. If you find faults, you should correct them. When you find none, you should try even harder...Israel Zangwill


Dr. Janice Dorn is the only Ph.D. (Brain Anatomist) and M.D. (Board-Certified Psychiatrist and Addiction Psychiatrist) in the world who actively trades, writes commentary on the financial markets and manages a subscription-based website. Dr. Dorn has been trading the gold futures markets full time since 1993. She has written over 1000 articles on trader and investor psychology, and mentored over 600 traders and investors.She writes on all aspects of trading psychology and provides a real-time trading service on her website: TheTradingDoctor.com.