Embracing Uncertainty and Ambiguity in Financial Markets.



Financial Markets are an uncertain place. - We often hear criticism of experts pundits, forecasters, analysts, and investment professionals, the critics assume that simply because someone is a market expert, they should automatically be right. - This point fails to grasp the fact that markets are complex environments, continually evolving, with countless variables, many of which are unknown, and even when they are known are not constant. In markets, one can only truly know the reason for a move with the benefit of hindsight, sometimes even hindsight doesn't shed a light on why a move occurred, in many cases it comes down to supposition. Compare this to say engineering, IT, law, accounting, finance, journalism, etc, where the problems, and challenges, though complicated, occur within relatively static environments. In these more static environments, analysis, testing, precedent, rules, laws, and science, can help provide answers and solutions. This is not how life is in financial markets.

I have been at a talk this afternoon in which the subject of ambituity and uncertainty was a major theme. Living with ambiguity and uncertainty, ia one of the biggest challenges for traders. Many people would rather actually book losses on potentally winning trades, than sit with the uncertainty of possibly winning, but also potentially losing. Call it 'Loss Aversion', 'Ambuiguity Aversion', or any number of biases, this is a human behaviour displayed by many people in the markets. - Paradoxically, I am not going to condemn that as wrong, some people can not help their behaviours. I know people who are highly risk, loss and ambiguity averse, who still make a fortune trading. They have learned to adapt their strategy and tactics to find work arounds for these issues. It is a little like someone who has a fear of flying, this does not mean they cannot travel, its just they find other ways of traveling.

I have attached 3 articles below which build upon this theme.

The first one from the 'Musing on Markets' blog: DCF Myth 3: You cannot do a valuation, when there is too much uncertainty! In this article there is an excellent list of tactics and measures proposed by the author to help him deal with uncertainty.

The second article, is not about trading, but has some useful perspectives on The Power of Living with Ambiguity

The third article, Don Miller on Trading and Improvisation is by top futures trader Don Miller, and focuses on an aspect of trading rarely talked about, Improvisation. Improvisation is absolutely vital for success when faced with the very extreme forms of uncertainty people face in trading. All great traders are great improvisors, and though the very best trading advice is about planning, in reality one can only make loose plans, the rest is improvisation.

Recent 'Behavioural Trading' Articles you may be interested in:

Winning at Trading and Investing - 'Its all in the Mind'.
The 10 Behavioural Traits of Highly Successful Traders.
The Pre-Mortem: A De-Biasing Technique to Increase Trading and Investment Success.
Meet the ‘One Person’ who could really transform your ‘Trading and Investment’ Performance.
FOMO (Fear of Missing Out): Is it killing Your Trading and Investment Performance?
Video:Trader Risk Personality - How it Influences Trader and Investment Performance.
Killer Biases: How 'Cognitive Dissonance' Devastates Trading & Investment Performance.
‘Billions’: Why Top Hedge Fund Managers Use Coaches?
Following the Crowd: Why we do it?

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Steven Goldstein is a leading Performance and Executive Coach working with Traders, Banks, Energy Firms and Hedge funds: He is Managing Director of at Alpha R Cubed, which works with banks and investment firms to improve their human capital within financial risk businesses. To know more about Alpha R Cubed, visit their website www.alpharcubed.com or email Steven at steven.goldstein@alpharcubed.com.

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