Dealing with cognitive dissonance, an insight into a hedge fund session

While improving your trading performance is a vital part of achieving consistent profits, this process can often lead to the psychological state of cognitive dissonance. I strongly suggest all traders understand this state. Cognitive dissonance refers to the uneasiness experienced between what you know and believe already and new information and ideas that you discover. This state often occurs when you receive some information that challenges what you  previously believed. Genius Traders are acutely aware of this state, however they are able to deal with it and still make consistent profits. Dealing with cognitive dissonance includes a few important points, having the ability to carry out more in depth research, accepting you cant know everything, being grateful for finding new information that will ultimately enhance your trading performance and being flexible in with your market ideas. I’m going to share with you a recent session Simon and myself (Martin) had with a hedge fund analyst, it will clearly illustrate how when you have confidence in your abilities and a solid method you will deal with cognitive dissonance better.

Martin:  What are you looking for when assessing an idea

Johan: Anything that can change the value of a companies shares, their business model, earnings and growth potential. Or anything that seriously changes my initial idea.

M: What is important to you when researching an idea or company?

J: Being confident in my ability to carry out in-depth quality research and trusting my ideas.

Simon: How do you know when you have a good idea, do you have a strategy to filter out poor ideas?

J: I don’t have a rigid plan, nor do I want one, I like to view the market through a flexible lens, I’ve reached a stage in my career where I’m OK with changing my ideas, if I find information that strongly suggests I do so. That wasn’t easy when I first started out in the fund, I guess I just wanted to please people, now I have a predefined outcome.

S: What is your outcome

J: To deliver quality ideas, that I believe in but also I think it is important I have the confidence and flexibility to change those ideas.

M: What defines a good idea for you, do you know?

J: I think I’m starting to Martin but of course it can change each day, it depends on the current market and the geo-political condtitons. I have at last developed the skill of changing my ideas as conditions change.

M: I’m assuming you don’t want to change your ideas every time you receive a new piece of information, you must need to have a strong belief  that your idea will and can work? How do you remain flexible and still implement an idea?

J: I sense you still have some concerns about my ability, to remain flexible and confident?

M: Not concerned Jo, I want to make sure you are moving forward and continuing to deal with cognitive dissonance, as your improve your skills. 

J:I believe I am moving forward yes, I sat down with the more experienced guys and discussed what new information will impact my ideas, just as importantly I needed to identify what affected my ability to process information and handle my ideas intelligently, as I improved my skills and my beliefs  changed I felt it is important to remain confident and proactive, these two traits must be a constant part of my thinking process. It’s vital I don’t shy away from new information just because it may challenge my previous market or company hypothesis.

S: Can I just clarify something, do you think being confident and embracing new information as a good thing helps you deal with cognitive dissonance and improves your performance?

J: Yes, if I wasn’t confident I’m not sure I could handle new information that challenged my ideas, if I didn’t constantly review my ideas by embracing and analysing new info I wouldn’t be doing my job to the best of my abilities. Being able to do this I believe gives me a definite edge.

M: How do you sharpen your edge, so you keep unearthing profitable ideas?

J:Well handling cognitive dissonance certainly allows me to remain sharp and profitable, the confidence I’ve grown in myself, assists me be my own man and to challenge managements views if I trust and believe in my ideas. I now have no problem in having a different opinion from the street.

I think the first thing to understand is new information and knowledge is a good thing for traders serious about improving their performance, if you have true confidence you will handle any info that challenges your ideas about the markets and your trading method . To simplify keep what is working for you and change what isn’t, new info is a traders friend, so let it in to your life.