Note here that the trader Dr. Steenbarger worked with had a colleague that “was trying to tell him that for weeks” but it was when the doctor pointed it out that the trader heard it. Maybe he didn’t trust the colleague’s opinion, maybe he was paying the doctor so he thought he should pay attention.

I have combined the two separate posts into one from Brett Steenbarger’s TraderFeed:

Social cognition has been a prominent topic of study within psychology for many years, as psychologists have attempted to understand how we make sense of our social worlds. Related to social cognition is the study of how we process information within social contexts: thinking as a social, not just individual, process.

We are accustomed to viewing thought as something that occurs wholly within our heads. Even casual observation, however, suggests that much of how we process information occurs within social interactions. Physicians consult one another over problem cases; teens sort out their problems together; and children learn to make sense of the world through their interactions with parents and peers.

I would argue that much of the value of counseling and therapy is that it provides a social context for processing self-relevant information and experiences. Many times, an individual in isolation cannot understand why he behaves in a particular manner and why he seems incapable of changing his patterns. Through the social medium of counseling, he gains a fresh understanding of self, which opens the door to new ways of acting and interacting. Indeed, many times the changes rendered by successful therapy first appear within the counselor-client relationship, only later generalizing to wider social networks.

In the business world, we commonly find work teams tackling difficult problems; group processes–rituals and ceremonies–also provide fresh perspectives within religions. Executives hire consultants; alcoholics seek peer groups through AA. It is difficult to find spheres of life in which people do not turn to social networks to guide themselves and their understandings. Indeed, the entire phenomenon of social networking in the online world–from Twitter and Facebook to virtual communities–reflects a recognition that much of how we think overlaps how we interact. To a surprising measure, thinking is a team sport.

There are interesting corollaries to this view. For example, intelligence may not simply be a function of how well one can solve problems in a test, but also a function of how well one can marshal the interactions needed to arrive at such solutions. When I interact with others, I experience my own ideas in a new context. That can either strengthen my convictions or lead me to modify them. You would be surprised at how much time hedge fund portfolio managers spend on the phone with peers, analysts, and brokers: they think by interacting, catching patterns in others’ thoughts that cannot be viewed in market data. To a large degree, they are not trading the markets; they’re trading the biases and consensus views of others.

With this as backdrop, allow me to advance an important idea: Much of the emotional disruption experienced by traders is a function of cognitive isolation. Facing only a screen, largely cut off from social processing, traders become–in a manner of speaking–less intelligent. They lose access to normal ways of talking out and testing out ideas. Without the perspectives of others, isolated traders lose perspective: small moves take on disproportionate significance; small pieces of market data are blown into biased views.

The decisions we make in a group/social context are not the same as those we would make in isolation. To be sure, group processes can dampen creativity and divergent thought; there is more to truth than democracy. But group processes can also serve as a check on our cognitive and behavioral biases. Many a spouse serves as a grounding influence on their partner; many a business partner has reined in a colleague’s impulsive tendencies. When we place a person in situations of heightened risk, reward, and uncertainty and *then* isolate that person from normal social regulatory interactions, the results are predictably dire.

Could it be that many struggling traders could succeed if placed within the right social contexts? The next post in this series will demonstrate that this is, indeed, the case.

Above I made the case that much of thinking is a social process; isolated from the back-and-forth testing and revising of ideas, traders lapse into internal feedback loops that magnify perceptual biases and action tendencies. In other words, many problems of discipline may boil down to problems of isolation–in lesser measure to be sure, but perhaps similar to the cognitive distortions and disordered behavior that occur during prolonged exposure to sensory deprivation.

What brought this to my attention was an experience with a large trader a little while ago. He had been losing significant money, much of which could be attributed to poor money management under conditions of frustration. My work with him, like much of my work in prop environments, took place while he was trading and was highly interactive. This is useful in two respects: it offers immediate feedback as to whether the coaching is helpful or not (P/L is a merciless judge!) and it offers windows into the processes that make the coaching more or less helpful.

With this particular trader, the results were notable. Significant losses, in a short period of time, became significant gains. Because this trader was placing dozens of trades per day and we worked together over many days, it was highly unlikely that the difference in performance was due to chance. Something about the coaching made a meaningful difference, but it was certainly not any grand market insights that I provided. In fact, I limited my discussion with the trader to observations of the trader’s trading and occasional observations of the behavior of volume, indicators, sectors, etc.

Nor did I provide what I thought were grand psychological insights; the coaching was not psychotherapy. The discussions simply focused on what the trader was doing that was working and what wasn’t effective, interspersed with normal social banter. One trader who observed us shook his head in disbelief. “I’ve been trying to tell him the same thing for months now!”

I think that was an astute observation. It wasn’t so much the content of the communications that was effective as the process: what had been a damaging internal dialogue of losing money, blaming self, becoming frustrated, and wanting to make the money back changed into a constructive social dialogue that was performance and market focused. Under conditions of positive social dialogue, the trader could access his skills at reading markets and executing good trades. Under conditions of negative internal feedback loops, the subtle felt cues of pattern recognition were overwhelmed by emotional upheaval.

The takeaway here is that what we know is at least in part a function of how we interact. In one mode of cognition–isolated from self-correcting feedback from interactions–we lose access to information and lose the ability to recruit skills. In another mode–grounded in constructive dialogue–we suddenly become exemplary performers.

Does this work for all traders? Not at all. There are plenty of traders who have benefited far less dramatically–and sometimes not benefited at all–from work with me. It may well be that traders who are most attuned to the social processing of information (the trader in my example is an extremely social, extroverted individual) will benefit most from interactive coaching. A different trader, one who is more analytical, might gain more benefit from interactions with a statistician or market analyst.

In either case, social interaction can augment traders’ cognitive processing styles, enhancing native strengths. This may not require formal coaching; rather, it may simply call for participation in the kind of peer dialogues that bring out the best in oneself. In talking to others, we inevitably hear ourselves and hear reactions to what we say. This, in turn, shifts how we view and respond to situations. It’s difficult to have a meltdown when you are sustaining constructive dialogue with a valued colleague.
.