It is tempting to espouse that our brains evolved for ‘thinking’ however Lisa Feldman Barrett challenges this notion and uses evolutionary theory and neuroscience to bust this myth with a brief book that offers 71/2 lessons in understanding the brain.
This book is very useful for traders seeking to understand behavioural finance. The baggage associated with errors arising from a ‘predictive brain’ when used for a different environmental context provides useful insights in how to tackle ‘intelligent markets’ governed by evolutionary biases of its participants. While Lisa does not discuss the role of the brain for trading we can draw some powerful insights when considering how the market environment is distinctive and apart from the natural environment in which we evolved.
As a ‘predictive’ species we can understand the powerful biases associated with our experiences that shape our behavioural responses and how, if we choose to adopt ‘rules based processes in markets comprised of predictive agents’, we could avoid some of the errors associated with the very natural consequences of a mind tailored to compete in a very different complex system.
Prediction as opposed to reaction clearly has worked in our natural environment where selection processes have conferred an edge to this ability, yet such selection pressures do not necessarily convey the same advantage in an ‘intelligent market’. In such a different context, the retail trader with his limited predictive capabilities is clearly outclassed by the Fund Management industry who have the resources to take prediction to the next level, yet opportunities do exist for those traders who prey on the ‘predictors’ with robust methods that offer an edge for those times when predictions fail as markets transition into new emergent forms.
Enjoy the book.
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