Learn To Improve Your Market Intuition: The Flavia Cymbalista Interview
Editor’s Note:
The following is an interview done by Dave Goodboy in conjunction with
RealWorldTrading.com.
After you read the interview, talk about it
here.
Brice
Hi, I’m Dave Goodboy, Executive Producer of Real World Trading.
Today, I am privileged to be joined by uncertainty expert, Dr. Flavia
Cymbalista. Flavia has a background in financial economics and psychology. She
is the world’s foremost authority on market epistolomology, which means a
specialist in how traders know what they know. She created a new approach called
Marketfocusing that dramatically improves decision making under uncertainty.
Marketfocusing teaches you how to work with your gut feelings in a systematic
and reliable way. She has worked with multiple super successful money managers
/traders. In an industry focused primarily on the quantitative, her work is
truly revolutionary. I am excited about this interview…let’s get started!
Dave:
Welcome Flavia, thank you for joining me today.
Flavia: Thank you
Dave, I am glad to be here today.
Dave:
What is it that you teach traders and fund managers?
Flavia: I teach
them to access information that they actually have but normally do not manage to
take advantage of in their trading and portfolio decisions. I teach them how to
work with their gut feelings in a systematic and reliable way; how to generate
gut feelings, articulate the information contained in these vague sensations and
transform that into objective questions. MarketFocusing is a methodology to
improve the intuitive side of decision-making in markets.
Dave:
OK, I know every trader has had that experience of just knowing that the trade
is right before even putting the trade on. Is that what you are talking about?
Flavia: Yes, and
in particular I am talking about the experience of feeling there is something
off with your trade. Sometimes you make a decision that looks perfectly rational
and logical on paper. In trading you take a look at your indicators and your
methodology tells you to do X. Yet something inside you complains. You feel it
in your body that something is off there. The decision is not sitting right. As
a trader, David, have you experienced these feelings?
Dave:
Sure, I experience feelings about trades. However, generally I endeavor to
fight the feelings and act in a rational, systematic manner.
Flavia: And do
these trades turn out to be winners or losers?
Dave:
Well, in these cases, more often than not they’re losers.
Flavia: Exactly.
Those trades usually go wrong. Afterwards, in retrospect, you can see that there
was a crucial factor in the situation that your logic or your methodology wasn’t
taking into account. You can see that in retrospect. My methodology,
MarketFocusing, teaches you how to see it with FORESIGHT rather than HINDSIGHT.
It works with the gut feelings and helps you articulate the factors behind them
with foresight, in advance instead of in retrospect. It then leads to decisions
that “sit right.†The decision is then rational AND it feels right.
Dave:
You mean, your head and your feelings agree?
Flavia: That’s
right. It’s a mistake to think that gut feelings and logical analysis
contradict each other. They’re complementary. Just think about it: You can
justify rationally any trade. There’s always a way of doing that. Any trade and
also its opposite. You can always find logical arguments for anything you
please. The right question to ask is: are my premises relevant in this current
situation? The models themselves can’t tell you that. Models are abstractions;
they’re independent of context, of the particularities of the situations.
Dave:
This all seems very mystical. How does your body know these things?
Flavia: We are
constantly absorbing and digesting information. We are doing that all the time
on a subliminal level. We are only conscious of a very small part of that
information. That’s explicit knowledge, the knowledge that we have articulated,
and with which we reason logically — just a little part of all we know. The rest
is subliminal; it’s stays in the background. When something in the situation
violates our experiential knowledge, the body complains. That is when you have
that funny feeling.
Dave:
We’re usually told not to pay attention to our subjective reactions, to be
objective.
Flavia: The truth
is that our subjective reactions contain information about the situations we’re
facing. This is true in any profession. Think about M.D.s. What’s the difference
between a good doctor and a bad doctor? The bad doctor — just like an
inexperienced trader — has a checklist and criteria that he uses without really
looking at the patient. The good doctor looks at a patient and has a feeling of
this or that, and gets puzzled. The funny feelings guide his questions, until he
gets to a diagnostic that wasn’t evident at first. It’s like that in any
profession. We have theories, concepts, and models, things that we already know
and that have already been articulated, conventional criteria, procedures and
best practices for decision-making. But they can’t tell you what’s relevant
right now. In markets, the risk and expected return of each position is
constantly being affected by a multiplicity of interacting influences, which we
cannot monitor one-by-one. Our analytical methods and quantitative tools are
based in the premise that in the future things will change in the same way they
did in the past. Of course we need analysis, but to base ourselves exclusively
on these tools can result in serious errors.
Dave: Yes, the map is not the territory.
Flavia: Exactly.
And the territory is not “the†territory either. It’s not a stationary thing;
it’s a multi-layered web, which is always evolving. And it evolves in ways that
escape our maps. That’s my definition of uncertainty: that which escapes our
models and theories. That’s where gut feelings come in. If you’re uneasy with a
position or decision, there’s something off with the way you have structured the
situation — with the mental map you’re using to navigate the territory. The map
can’t give you the answer — the answer emerges from your situational sense of
the territory. This situational sense is in your body: the unease is telling you
that you’re leaving something crucial out of the picture, using an old map, and
it’s time to re-map the situation.
Dave:
So, that’s how gut feelings come in. They tell you to check your premises.
Flavia: You got
it. Superior performance requires not only good analysis based on the past but
also a bodily sense of the market process and how it’s currently evolving.
Because of uncertainty, we have to constantly re-map the territory. And our
bodies help us do that. Neglecting what your body knows results in avoidable
losses and missed opportunities — not to mention stress and sleepless nights…
Dave:
Let’s back up into the concept of uncertainty. You call yourself an
“uncertainty specialist†and also a “market epistemologist†— a specialist in
how traders know what they know, in their ways of knowing. How did you get into
that in the first place?
Flavia: At the time I did my
doctorate in Financial Economics, the academic discussion on whether markets and
market participants are “rational†or “irrational†was just beginning — until
then, the huge majority of academics believed markets to be “efficientâ€, that
is, to fully reflect fundamental value at any point in time. It struck me that
there was a huge gap between what the academics were saying and the experience
of market participants. The academic theories left uncertainty totally out of
the picture. They’d talk about risk, which involves stationary probability
distributions, but not true uncertainty. But uncertainty is the essence of
what’s going on in the market! It’s what market professionals are paid to deal
with! I saw that the traditional definition of economic rationality was only
adequate in a deterministic world — where you have the stationary distributions
and can compute the best course of action. The really interesting question, I
thought, was: What does it mean to be rational under uncertainty? As I explained
above, to be rational under uncertainty requires more than logical thinking
alone.
Dave: So
you expanded the concept of rationality to include intuition.
Flavia: That’s
correct. To be rational under uncertainty we need more than logical computation.
There’s something that traders do that is not in the models, in the computers,
in the systems. It needs a living person participating in the situation. Look at
the difference between a beginner and an experienced trader. Both can have the
same tools, the same models, know the same theories, and yet there’s something
that the beginner doesn’t have. It’s the invisible side of trading.
Dave: This would be experience.
Flavia: Yes, But
what does that entail? All good traders agree that having a feel for the market
is what makes the whole difference between a good trader and mediocre one. They
tell you they smell the market, feel the market. Yet they can’t tell you exactly
how that works. And it’s very difficult for a trader to work with his feelings
on purpose. You have a feeling, sometimes you don’t have a feeling, and these
feelings come as they please. It is not something you can usually control. I
then asked: can this be improved, can this be taught? And developed
MarketFocusing, which teaches people to bring forward gut feelings anytime they
need them, and know if they’re reliable or not.
Dave:
How did you create MarketFocusing?
Flavia: Well, it
took me a lot of reseach — and experimentation. The starting point was the work
of Eugene Gendlin, a philosopher and psychologist, who specializes in the
relationship between logical reasoning and experiential, embodied knowledge. He
developed a methodology called Focusing, in the 70s, at the University of
Chicago. I adapted this technique for financial markets, and developed an
application for decision-making under uncertainty.
Dave: Is
there a step-by-step process to this?
Flavia: Yes,
there is a step-by-step process. I’ve written about it, with different
applications, in a series of articles on “How George Soros Knows What He Knowsâ€
for the magazine SFO. They’re available on my site:
www.marketfocusing.com. However, my experience is that you can’t learn the
steps just by reading the instructions. You have to experience the process. It’s
only then that you can really see how powerful the steps are and learn how to do
them yourself, on your own.
Dave:
So, how do you teach MarketFocusing?
Flavia: I teach this
process one-on-one. The training has three segments — each is a session of about
1.5hrs. Each time I emphasize a specific aspect of the process. The first
concentrates on listening to your organic reactions. It teaches you how to find
them and the right way to listen to your gut so it will tell you what it knows,
The second segment teaches how to separate real gut knowledge from emotional
reactions. A reason why gut feelings are so often unreliable is that your bodily
reactions initially include emotions and irrelevant factors and motivations that
have nothing to do with the actual situation. In the second session, I teach my
clients to separate emotionality and other irrelevancies from the complex and
subtle feelings that enter into reliable gut calls. In every session we work
with the actual decisions and positions that the client has, I guide them
through the steps — and adapt them to each person. By the third session, the
clients have experienced the process many times. It’s only then, when the
building blocks are in place, that the step-by-step makes sense. After the third
session, clients know how to guide themselves.
Dave:
Can anyone learn MarketFocusing?
Flavia: The methodology
is made for professionals. It does not substitute for experience — it builds on
experience. Without experience, the person has no “raw material†to work with.
I’ve had beginners come to me and say they wanted to “improve their confidenceâ€.
But the truth is, they have no reason to be confident — they don’t have enough
experience. There isn’t much I can do for them. On the other hand, the more
experienced and the more intuitive a person already is, the more he or she will
benefit from the methodology.
Dave: We
are just about out of time here, is there anything you would like to leave our
members with?
Flavia: Well,
there’s much more….Best for those who are interested is to visit my site and
read the articles. The address is:
www.marketfocusing.com
Dave:
Thank you very much.
Flavia: Thank you.