NetPicks Interview with Denise Shull Author of Market Mind Games Part 1

8/3/2019 NetPicks Interview with Denise Shull Author of Market Mind Games Part 1

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NetPicks Author SeriesInterview with Denise Shull, Author of Market Mind Games

- Part 1 of 5 -

In NetPicks¶ Author Series, NetPicks President Mark Soberman sits down with theleading day trading authors as they discuss key concepts that will help individuals elevatetheir trading. Read this 5-Part series as Mark chats with Richard Weissman, author of Trade Like a Casino, and see what insights are in store.

To listen to the entire interview, to listen to past interviews with top trading authors, or to

be notified of future webinars, please visit: http://netpicks.com/authorseries.

Mark Soberman: Denise, appreciate you joining us today. Denise is the author, as youcan see on your screen, of "Market Mind Games," profiting from the new psychology of

risk, uncertainty and the convergence of trading with investing. So again, Denise, we

appreciate you joining us today. Usually, I always like to kind of kick this off, you know,kind of giving you an opportunity just to give us a little bit of your background, your background in trading and maybe a bit behind what the inspiration was for the book

overall.

Denise Shull: Okay. Well, back in the '90, '93, '94, '95, I was actually innocently gettinga master's degree at the University of Chicago in the neuroscience of unconscious,

neuroscience of emotions. I had friends who were floor traders at the CBOE and theyhad wanted me to come down on the floor because, for some reason, they thought that I

would be a good trader, and I wasn't interested in going down on the floor and doing thesort of jostle for space these guys, you know, half a foot taller than me. And NetNet, as I

finished my master's thesis, they convinced me to go upstairs. There were some of thefirst few guys to go upstairs, and the deal was that I would keep track of their trades

because they didn't have intraday P&L back then and they would teach me to trade. Andthey were right. I had talent for it and so the Ph.D. went by the wayside. And for the

next solid decade, I traded and moved in New York to manage training desks but stillstudied psychology, neuroscience, psychoanalysis on the side, and an opportunity to

rewrite my master's thesis for publication, at which point it was extraordinarily clear thatyou have to have the emotion to make a decision. And that's a neuroscientific fact.

There's no arguing with it from a grand science point of view. But as we all know,everybody in trading and finances "control your emotion." So I was like, wait a minute,

you have to have this, but you have to control it. There's conflict here.

So I was having that conversation with someone who's actually the right-hand person to arelatively famous trader, and he said, "Well, you should write an article about it." So I

was like, "Who's going to publish an article by me?" And he introduced me to an editor and published an article, and then trader started to call coaching and I really dug into the

research on decision-making which was taken in academia and had taken a huge uptick because of the ability to see in the human brain and see what's happening while people



are making decisions under uncertainty and risk decisions. And to make that long storyshort, as it can be at that point, six years later, all of that turned into this book.

Mark Soberman: Yeah. I mean, that's what I really enjoyed about the book. I always

like things, especially in trading, that go against the conventional wisdom and that when

you, right from the start, say, "This is a lot -- this is about putting the emotions andfeelings back into trading and obviously the conventional norm always says, you know,trade without emotion, cold and calculating, and that's the way you need to do it. Even at

NetPicks, in our training, we're probably, you know, I'll say at this point after reading the book, guilty of that as well because sometimes the path of least, I don't know, resistance

in training people is they're a total wreck when they trade and you kind of just want themto shut all of that off. But really a lot of your teachings is, I guess in some ways, the

exact opposite, though you talk a lot about how you can sort of like systemize thesefeelings and turn it into data. So I don't think it's just a question of just being an

emotional wreck when you're trading. Can you kind of explain a little bit what you mean by sort of embracing the emotions, about how do you actually do that in a positive way?

Denise Shull: Well, first of all, you can just -- a feeling is just a feeling. And so it's

possible to feel something and not act on it. So the right advice is to control your actions-- , analyze your emotions, control your actions. It's actually a logical error to think that

we have to control the emotions. And the downside is, the more we try to control theemotions, the more likely we will be to act on them because, at least the theory is,

emotions are a way that our psyche is communicating something to us that we need toknow in terms of adaptive, evolutionary, moving forward, like it's reasonable to be afraid

in certain circumstances, it's reasonable to be anxious, it's reasonable to be angry. All of those feelings actually have a positive view, but none of us, I mean, have been educated

in how to use them that way and, in fact, we've been educated in just the opposite.

So what people find is if they allow themselves to just feel what they feel without judgment, put it into words, because that's just an important part of the getting it into data

format, they often find they can look at the feeling and say, "Well, either that does or doesn't apply." That gets to the road to the ultimate question which is knowing the

difference between a feeling that's intuitive or experiential learning unconscious patternrecognition and a feeling that's impulsive which is driven by one's history and the

meaning of one's history. And that's not the feelings that you want to -- and that's thefeelings that you want to use as risk management feelings, not the feelings you want to

use as strategy feelings.

But the problem is the Zeitgeist in psychology is still cognitive behavior -- thinking and behaving, so the Zeitgeist in training psychology, sports psychology is still thinking and

behaving. And even someone like Jennifer Lerner of Harvard, she runs the decision-making lab at Harvard, wrote a couple of years ago that, for 60 years, no one in

psychology or research paid any attention to emotion and it's turning out to be the mostimportant thing that's actually going on in our psyche, proven by many, many different

angles of research. And at the end of the day, I gave a talk last night in New York andthere were a lot professional that they've been kind of traders there, and everybody said



what people have been telling me for the last six to eight years which, on some level, weall sort of know this, but we just haven't been able to put it together in an organized way.

Mark Soberman: Well, it's interesting because it seems like we've all sort of been force-

fed, you know, this shutting down of the emotions in particular one, you know, we're all,

you know, traders here and I think I recall like in the book you sort of dated it back, youmentioned Dr. Markowitz who, I believe you mentioned, is sort of like the father of portfolio allocation and everybody is sort of glommed onto the quantifier parts of it, you

know, 20% here and 30% here and 50% here, and that contrary to what everybodyremembers, his study actually talked a lot about how beliefs play a huge role, right, in

investing overall, but it was sort of just this forgotten thing. I mean, why is theconventional wisdom just glossed over all that and instead, you know, we've missed like

a big part of this?

Denise Shull: Well, it's called something else that's been researched in the psych labs andthat's our aversion to ambiguity, discomfort with conflicting information. It's just easier

and feels better if something's precise and clear. Now, by definition, markets can't be precise and clear. I mean, there are no facts, it's always about the future, it's always about

other people's perception in the future. So all we can ever do is make judgment calls, butwe're really compelled, and this has been proven experimentally in many other places, to

try to make things precise even if they're not. So that's why people skipped over Markowitz's stage one and his three additional warnings in this Nobel Prize-winning

paper to go back to skip stage one because the quantifying part is the relatively easy partand it gives us the solution that feels better, at least temporarily.

So I don't know if that answers the question, but it basically boils down to numbers make

people feel more comfortable, but we're really tricking ourselves.

Mark Soberman: Yeah. I mean, we run into that a lot. You know, obviously we'retraining people how to trade and when we start going into anything that's a bit more

fuzzy, when we talk about things like the art of trading that you have to factor in that hasto go beyond the mechanics, it does -- people do get very uncomfortable, you know, at

that part. I think you mentioned that, you know, Markowitz was talking about, youknow, judgment, right? You need to have judgment in trading that has to go beyond, I

guess, the black and white formal computations, I mean, so -- I mean, how much do youthink this judgment has to factor into the ultimate decisions, you know, really beyond like

what the stochastic says at a given moment?

Denise Shull: Well, my recommendation is that everyone make their objective in tradingto improve their judgment calls or -- well, like they would call their goals. I have a

certain format for goals, objectives, trades and tactics I learned at IBM. But, you know,whether you call it a goal or objective, you'd step back as your endpoint in proving your

judgment and then you look at everything that you do in trading and say, "How does thatrelate to improving my judgment?" It's not a matter of throwing your analyticals out, it's

not a matter of throwing the Stochastics out, it's not a matter -- as I was speaking to thegroup last night, some of them were fundamental stock pickers from mutual fund -- it's



not a matter of throwing their numbers out. It's a matter of putting them in the rightcontext and realizing that they don't offer up the absolute answer. They offer up clues to

the judgment call you're going to make, but at the end of the day, there's always got to bea judgment call.

So when you do that, it changes all kinds of things you do in relationship to your trading plan and your overall psychological plan for your trading plan, if improving your judgment is the objective and the net benefit of improving your judgment, for example,

is, let's say, you erased the worst 15% of your trades from last year, like what sort of difference would that make to your end-of-the-year P&L? Most people say, "Wow. You

know, there were those four times where I just really messed up." Well, if you set out toimprove your judgment, you're likely to reduce the worst part of your trading. And then

through reducing the worst part of your trading, what have you got? You both don't --you avoid that period where you have to psychologically recover as well as financially

recover. So you just are always playing at, like, one level up and then where can you gofrom there as you keep trying to improve your judgment, you know, thinking of it from a

really risk management point of view, avoiding the worst of your trading judgment calls,your trading decisions, your trading days, and then what does that do to your P&L and to

your psychology and being set up to take advantage of opportunity because you're notrecovering from something you did a day or two or a week or a month ago.

Mark Soberman: Yeah, I was -- it reminds of -- I'm going to get to it a little bit a later,

but you talked you about the trading temper tantrums, so if you could eliminate thosefrom your trading, how much different would your results be? And I can think of a few

times that I had those tantrums in the last year, how much they're off potentially, youknow, the bottom line would be without those.

One thing that I thought would have been interesting maybe to ask the audience because I

kind of have a feeling where people would weigh in on this is if we were to ask them, like before hearing you, do you think, you know, the cold and calculating, very specific,

precise trader is better or do you think the person who you mentioned has, you know,more intense feelings is actually going to have the higher decision-making performance?

I think most people would automatically gravitate towards, well, it's got to be cold andcalculating. That's the only way that you can trade them in. It sounds like what you're

saying is really totally counterintuitive to that, but actually, you know, the more intensethe feelings, the better. I guess my question is, you know, why is that -- is the person that

is having those more intense feelings, do they just do a better job of confronting thefeelings, they classify them, they understand the context? I mean, so what's the secret to

that?

To listen to the entire interview, to listen to past interviews with top trading authors, or to be notified of future webinars, please visit: http://netpicks.com/authorseries.

NetPicks Interview with Denise Shull Author of Market Mind Games Part 1

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