Generally in the course of my conversations with aspiring traders the question “Can I become a successful trader ? comes up in one form or another. I think as with most other things in life almost anybody can succeed if they really want to and are prepared to pursue the goal.
I also recently came across a short test that has previously been given to professional traders. The answers apparently correlate reasonably well with the likelihood of the individual suffering from some of the main psychological biases which contribute to traders failing. So if you can pass this test you may well have a head start over many others – give it a try !
There are just three questions: – give your answers before reading past the questions.
1) A bat and ball together cost £1.10 in total. The bat costs £1.00 more than the ball. How much does the ball cost ?
2) If it takes five minutes for five machines to make five widgets, how long would it take for 100 machines to make 100 widgets ?
3) In a lake there is a patch of lily pads. Every day the patch doubles in size. If it takes 48 days for the patch to cover the entire lake, how long will it take to cover half the lake ?
The answers are at the bottom of the page. If you did not get them all right don’t panic because:
Of 3,500 members of the public who were set these questions only 17% managed to get the answers to all three correct and 33% managed to get all three questions wrong !
Of MIT students in the USA ( The US equivalent of Oxford and Cambridge students) still only 48% of them managed to get all 3 correct.
Much more surprisingly of 600 professional investors (fund managers, traders, analysts) only 40% got all 3 correct and amazingly 10% got all three wrong ! (in fact in years gone by I think I have had some of my money under management by one of the ten percenters ! – it sure would explain a few things !)
So even if you got none correct – don’t give up the goal – your still in the same boat as 10% of professional investors and you now have the very big advantage of being aware of your susceptibility to behavioural biases and can take the necessary action to protect yourself.
So what are the implications of getting high or low scores ?
VERY briefly (and with apologies to any psychologists out there !) :
It is known as a cognitive reflection test. A CRT – measures the ability of the brains C system to check the output of the brains X system.
The X system is the emotional part of the brain and makes decisions based primarily on emotional responses to external inputs (ie acting out of anger or fear etc) and is faster acting than the C system.
The C System is the logical part of the brain and it therefore reaches its decisions by logically processing all the information in a step by step non emotional manner and hence is slower to process information than the X system.
Hence there is a tendency for the X system to beat the C system to decisions – sometimes this is a good thing ie in days gone by when taking the decision to run from a Sabre Tooth Tiger ! – but in trading its generally recognised as being a bad thing.
In trading ideally we need to be using the C system ie processing information and making decisions based on logical analyses rather than acting out of pure emotion (act in haste and regret in leisure !)
So the obvious “quick” answers to the above questions are incorrect and if you managed to avoid “jumping” to these wrong conclusions it may well mean that your C system is holding the X system in check – which is exactly what needs to happen when trading.
The number of questions that you get correct correlates reasonably well with your general vulnerability to a whole plethora of cognitive or behavioural biases – such as the biases of loss aversion, conservatism, impatience etc. those that got none right are more prone to suffer from these biases and need to take steps to control them when in the trading environment.
Certainly most would agree that falling foul of our cognitive biases by acting emotionally rather than logically is high up on the list of reasons why traders fail – both amateur and professional alike.
If you got all three questions wrong it means that when trading you will need to concentrate on holding in check the emotional side of your personality (now that you are aware of that tendency) and if you got all three questions correct then you could be off to a flying start.
Answers £0.05 – 5 minutes – 47 days