Trend Following, 5th Edition

7 Decision Making

“Would you tell me please which way I have to go from here?”

“That depends a good deal on where you want to go,” said the cat.

—Lewis Carroll¹

We see heuristics as the way the human mind can take advantage of the structure of information in the environment to arrive at reasonable decisions.

—Gerd Gigerenzer²

Trend following strategy approaches day-to-day trading decisions in a way most would not recognize: K.I.S.S. For example, each day millions of fundamental traders around the world attempt to evaluate a relentless onslaught of confusing, contradictory, and overwhelming market information, all to hopefully make profitable trading guesses for that day (e.g., the type of information on daily finance news).

Any individual decisions can be badly thought through, and yet be successful, or exceedingly well thought through, but be unsuccessful, because the recognized possibility of failure in fact occurs. But over time, more thoughtful decision making will lead to better overall results.

Robert Rubin³

Although they know decisions should be educated and, based on factual data, they see impulsive action as sound decision making, leaving them with absolutely no clue. They either end up paralyzed and make no decision, let someone else decide or guess. It’s a vicious and repeating cycle of decision-making frustration.

Terrence Odean, a professor at the University of California, Berkeley, uses a roulette wheel to illustrate. He postulates that even if you knew the ...