In Theory U, C Scharmer proposes a new model for social change. The model has direct application to our topic.
In Figure 1 we have the steps of the model. We start with ‘downloading’ - in this stage we use only the patterns of the past: a schema unchanged by fresh information and the insights and changes it brings. Performance results are totally dependent on the past. In this stage, the NLP dictum, ‘the past dues not equal the future’ proves false. Insanity, as defined by Einstein, ‘doing the same thing over and over again and expecting different results’ is the norm.
Downloading exits on many different levels of trading experience:
- at the newbie level - not the raw beginner - but the trader who has had some trading experience. A raw beginner can be forgiven for believing that for
- US$97 (or US$3000.00) with
- little capital and
- little or no effort, the keys to financial nirvana will be his.
But you’d think that after being in the market and losing your shirt, our newbie would start to challenge his assumptions. Yet in my travels as a coach and mentor, I am amazed on how many apparently intelligent traders refuse to budge from the initial position.
2. At the expert level. I have read that experts are most likely to fall victims to the ‘overconfident’ and ‘closed-mind’ heuristics. Nowadays it’s not hard to find examples of this occurrence among our failed hedge funds. But the booby prize must go to the Federal Reserve in its handling of this crisis. Bernanke acted as if Milton Friedman’s postulate is fact: that had the FED not let money shrink , the Great Depression would have been averted. This was a Friedman theory that still needs to be proved.
There are other theories just from economists of equal standing to Friedman - e.g. Irving Fisher. Fisher argued that when excessive debt led to price decline, the decline would overwhelm ‘all or nearly all’ other variables. The US debt is 360% of GDP - the highest since 1870 and climbing. It is unlikely that increasing the US debt levels would lead to a recovery. But let’s say that somehow it does and does so without causing hyperinflation; all this means that the piper will be paid in spades farther down the track.
So what does all this have to do with traders?
For a trader, trading with a ‘download’ mentality is probably the path to self-destruction. It is unlikely the trader will climb out of the ‘it’s-an- easy-and-quick-route-to-wealth’ mind pit. Our job as students of the market is to see facts as they are and not as we wish them to be - Scharmer’s ’seeing phase’.
More on this tomorrow.
FIGURE 1 THEORY U
Figure taken from Theory U by C Otto Scharmer
Refer this blog post to a friend or colleague…
