The basic idea is when a trader is not comfortable with ambiguity, the trader tends to seek more data than necessary.
A simple exercise to determine ambiguity aversion quotient in your trading:
- Count the number of inputs you considered in your back testing to initiate & manage a trade. Assumption: Reader has a method/plan that was back tested via automated, sim or live trading.
- Now count the number of inputs you considered in last 10-15 trades. Or all the inputs you would consider for your next trade.
- Now calculate the difference (i.e., subtract 2 from 1) and multiply by 5%. Result is the ambiguity aversion quotient in your trading.
Two questions to ponder:
- If the extra inputs you consider in live trading are really needed and improving the performance, then why is it not included in the trading plan?
- If those extra inputs are not improving the performance then why are you considering them and making your trading complicated?
Obviously I am not a psychology expert. So treat above as fun. Who knows the exercise might trigger some other insight that might also prove useful.
Note: If you are a not a trader then just use "decision making" as proxy for trading.
Trading is an art of uncertainty and science of probability.
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