A Trader Journal

Rational decision making strategies are typically logic based i.e., involve a cognitive process with steps like define situation, identify options, compare and evaluate,  and then eventually decide on the best potential option. There are many different types of rational decision making models. Plan to cover these in future posts.

Intuitive decision making strategies are those that appear on surface having no rationale or logic i.e., lucky guesses, hunches and coincidences. These straregies rely on inputs and ideas that you don't know exactly how and where you got them from. I couldn't find much information on models purely belonging to this category but may be I will in future weeks.

Gary Klein's Recognition primed is a combination of Rational and Intuition i.e., intuition is used to generate a plan of action and then you use rational logic to confirm it as appropriate. Following is the link for his book - "The power of intuition" .

Recognition Primed Decision Making Model

Background?

In 1985 Gary Klein and others began working on studying how decision making happens in army or how fire fighters make decisions. One of the surprising things they realized is that these decision makers are not comparing list of options. They were not even comparing two options. So they revised the whole project and came up with this recognition primed model to explain how people make decisions.

How does it work?

Basically in this model, from a given situation the decision maker will pick cues and indications that let them recognize patterns. Based on these patterns and decision they have to make, the decision maker will chose a single course of action i.e., an action plan they feel will achieve the desired outcome.

Now how can these people assess the validity of a single option without multiple options on the table? What Klien et al, found was these people would run the action plan through a mental simulation i.e., the decision maker has an idea of how things work based on the knowledge that has been gained from experience. So he compares mentally the option he chose against what is known to work.

If they consider that chosen option might not work because of a potential problem, they might try and alter the action plan in some way. If mentally they feel it will still not work, then they discard it completely and chose a new action script. They will keep doing this till they find an option that they think will work. As soon as they find option that they think will work, they will utilize it. The key point is there is no comparison among options like which is best option.

How does expertise develop?

As people gain more expertise (for traders - more screen time), they have more experience, a more richer mental model and their ability to recognize patterns is enhanced. This gives them more options to chose from and better ability in choosing options. Which means that, more often than not the first option they chose will work.

How is it a combination of rationality and intuition?

Basically intuition is used to recognize the situations, identify patterns via mental simulation and help to decide how to respond. Rational analysis is used to verify that intuitions are appropriate to the situation.

Thoughts? Comments?

As a trader facing high pressure situations each day, how do you currently combine rationality and intuition in decision making? Any particular situations where you use this more often? Any suggestions to other traders from your experience? General comments? suggestions? Needless to say I am not an expert on decision making. So feel free to point out any errors/suggestions in my understanding of this model.

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