Why Most Traders Fail

The answer to the question: "Why do most traders fail?" has been a source of research by many people, both within our industry and outside it.

I have had a lot of ideas about what the answer is and it is only now that I believe that I know why. Much of the reason has already been discussed in this blog.  The missing part of the answer is that we take mental short cuts in our decision making. The problem is that these mental short cuts often don't work.

This "solution" became clear after reading The Undoing Project: A Friendship that Changed the World, a book by Michael Lewis of Liars's Poker fame. The Undoing Project describes the collaboration between two psychologists, Daniel Kahneman and Amos Tversky, who created the field of behavioral economics and won a Nobel prize in economics. Kahneman subsequently wrote Thinking, Fast and Slow and received the American Presidential Medal of Freedom.

I highly recommend both books if you want to understand how we can fool ourselves in our decision making process. It takes work to change the way we make decisions, especially if we are discretionary traders who make lots of decisions with not a lot of time to make them.