“If we fail to teach students to examine data critically, looking for points both favoring and opposing hypotheses, we are selling our youth short and mortgaging the future of scientific inquiry itself.”
Bradley Mills

Sigmund Freud

The ego is a particularly strong component of the human mind and we are naturally prone to certain egocentric tendencies. All traders and investors must work to understand these tendencies. Here are some bullet points extracted from Copyright© Foundation for Critical Thinking http://www.criticalthinking.org:

• Egocentric memory: The natural tendency to forget evidence and information which does not support our thinking and to remember evidence and information which does.
• Egocentric myopia: The natural tendency to think in absolute terms within an overly narrow point of view.
• Egocentric infallibility: The natural tendency to think that our beliefs are true because we believe them.
• Egocentric righteousness: The natural tendency to feel superior in the light of our confidence that we are in the possession of THE TRUTH.
• Egocentric hypocrisy: The natural tendency to ignore flagrant inconsistencies between what we profess to believe and the actual beliefs our behavior imply, or inconsistencies between the standards to which we hold ourselves and those to which we expect others to adhere.
• Egocentric oversimplification: The natural tendency to ignore real and important complexities in the world in favor of simplistic notions when consideration of those complexities would require us to modify our beliefs or values.
• Egocentric blindness: The natural tendency not to notice facts or evidence which contradict our favored beliefs or values.
• Egocentric immediacy: The natural tendency to over-generalize immediate feelings and experiences — so that when one event in our life is highly favorable or unfavorable, all of life seems favorable or unfavorable as well.
• Egocentric absurdity: The natural tendency to fail to notice thinking which has absurd consequences, when noticing them would force us to rethink our position.

Read through that list as a catalogue of trading mistakes and the recognition is uncomfortable. Egocentric memory is why traders remember their winning trades in detail and dismiss their losing ones as bad luck. Egocentric infallibility is why traders hold losing positions long after the evidence that the thesis is wrong has accumulated: they believe they are right because they believe it. Egocentric immediacy is why a losing streak feels like the system is broken and a winning streak feels like genius. Egocentric blindness is why traders ignore the price action that directly contradicts their view and find reasons to hold the position anyway. Every item on this list is a documented failure mode in trading, and every one of them is a failure of the ego overriding objective evidence.

Systematic trend following is the structural solution to this list. A mechanical system has no ego. It does not remember selectively, does not hold beliefs, does not feel superior, does not simplify to preserve a comfortable view, and does not generalize from recent results. It reads current conditions against current rules and responds. The trader’s job is to follow the system, which means overriding the egocentric tendencies on the list every time they pull in the opposite direction. For the rules that define what objective response to market conditions looks like in practice, see the TurtleTrader rules.

Skepticism and Critical Thinking: Think the Trade

A great quote from Austin Cline:

What is the best way to approach or deal with complicated claims? What is the best way to apply logic in order to construct sound arguments? What are logical fallacies and how can they wreck an argument? What other sorts of common errors do people make when creating arguments? What can science and philosophy do to help us in our arguments? These are all very important questions. If you are going to make a claim, you should be prepared to offer an argument that supports that claim. Your arguments should, in turn, be well constructed — otherwise, they won’t support anything. If you want to not only do a better job with your own arguments but also with the analysis of others’ arguments, you should spend some time learning about logic, fallacies, and the nature of reasoning.

A good example of the “thinking” needed:

I toss a coin and heads turns up five times in a row. Which side is more likely to turn up the next time? Heads? Five heads in a row is a pattern — the trend is likely to continue. Tails? Six heads in a row is unusual so tails is more likely. These answers are examples of gambler’s logic — the perception of patterns in random data. So which is the correct answer? Neither — every coin toss has an even chance of turning up heads or tails. It never varies.

The coin toss example cuts directly to one of the most damaging egocentric tendencies in trading: pattern recognition applied to genuinely random data. Traders experiencing a losing streak feel that the next trade must be a winner because the streak cannot continue. Traders experiencing a winning streak feel their recent success predicts continued success. Both are examples of gambler’s logic. Both are expressions of egocentric immediacy, over-generalizing recent experience to predict the next outcome.

Systematic trading resolves this by making the next trade decision independent of recent results. The system takes the next signal because the signal meets the criteria, not because the last five trades were wins or losses. The rules do not know what happened last week. They evaluate only current conditions. That statistical independence from recent results is what allows a systematic approach to maintain its edge across the inevitable sequences of wins and losses that any probabilistic process produces. For more on how trend following applies statistical thinking to overcome these tendencies, and for the full story of how the original experiment was designed to do exactly this, see the TurtleTrader story.

Frequently Asked Questions

What is egocentric memory and how does it hurt traders?

Egocentric memory is the natural tendency to remember information that supports our beliefs and forget information that contradicts them. In trading it produces traders who vividly recall their winning trades and dismiss their losing ones as exceptional bad luck, preventing an accurate assessment of a system’s actual performance and making it difficult to identify and correct real errors.

What is gambler’s logic and why is it dangerous in trading?

Gambler’s logic is the perception of patterns in genuinely random data. A coin that lands heads five times in a row has exactly the same probability of landing heads on the sixth toss as it always did. Traders who believe a losing streak makes a win more likely, or that a winning streak predicts continued wins, are applying gambler’s logic. Systematic rules that evaluate each trade independently of recent results eliminate this error entirely.

How does systematic trading overcome egocentric tendencies?

By replacing the trader’s real-time judgment with predefined rules. A mechanical system has no ego. It does not remember selectively, does not maintain beliefs about what should happen, and does not generalize from recent results. Every decision is made by the rules against current conditions. The trader’s ego is removed from the decision at the moment when it is most likely to distort the outcome.

What is egocentric infallibility and how does it manifest in trading?

Egocentric infallibility is the tendency to believe something is true simply because we believe it. In trading it manifests as holding a losing position because the original thesis still feels correct, refusing to accept that the market’s price action constitutes evidence against the view. The trader believes the position will recover not because the evidence supports recovery but because they believed in the trade when they entered it.

Trend Following Systems
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