CHAPTER 26
The Surprising Real World of Traders' Psychology
INTRODUCTION
People have speculated about the workings of their minds for centuries. As capitalism emerged and markets evolved to trade not only in commodities but in other financial securities, the questions and conundrums increased. How does a person make the best prediction decision when the irreducible question is what perception of value other market participants will have in the future. Known as Theory of Mind (ToM), the difficulty of predicting others' future value perceptions has led to innumerable variations on quantitatively based decisions. Yet, sophisticated and previously successful market interaction strategies, such as J.P. Morgan's now-infamous “2012 London Whale” (i.e., the nickname for a trader who successfully traded a complex strategy for an extended period of time before his positions were significantly large that other hedge funds were able to trade en masse against him), self-destruct on essentially a regular basis.
Recognizing both the remaining mysteries in human judgment and the incomplete resolution in probabilistic answers, some market participants have hired psychological consultants. For example, SAC Capital hired Dr. Ari Kiev, a psychiatrist who had coached Olympians, ...
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