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Daniel Kahneman is my favorite finance professor. He is also a noble prize winner for his work in behavioral finance.
In an interview, Mr Kahneman talks about intuition and checklists.
On intuition, he says: “My general view is that you should not take your intuitions at face value; overconfidence is a powerful source of illusions…… I’d add that the amount of success it takes for leaders to become overconfident isn’t terribly large. Some achieve a reputation for great success when in fact all they have done is take chances that reasonable people would not take.”
My Notes: We know of many traders who appear to be extremely successful. Yet, chances are their success is based on talking extraordinary risk. the reason for their success may be just luck. The best way to trade is to trust your strategy (not intuition), take reasonable risks.
On checklists: Mr Kahneman suggests he likes checklists as a solution to decisions in uncertainty (all trading is done under uncertainty!).
“The checklist doesn’t guarantee that you won’t make errors…. but it may prevent you from being overconfident.
The problem is that people do not like checklists, there is resistance to them. So you have to turn them into a standard operating procedure….. A checklist like that would be about process, not content.”
My Notes: This is excellent advice for traders. Make a checklist, go through the checklist before taking a trade.
Dear Sir, Nice reading. Kindly suggest some checks and balances for retail investors.
Totally agree, sir. Checklists are the key to discipline. Yes, they are boring. But when followed, they save us losses and increases chance of profits.