Monday, January 26, 2009

Tuning up the mind

In The Nature of Risk, Justin Mamis concludes his sixth chapter with the following remark:

Intuition, although seemingly spontaneous, apparently emotional, stems from a form of "information" that has become built-in from past experience. Discipline means choosing what to do unencumbered by the fear of making a mistake. Confidence means trusting our intuition that what we "see" is what we "know." There's no escaping to the external, to the objective, and no standing on the shaky ground of emotions. So the question becomes, How do we create within ourselves the heroic condition of confidence wherein risk is not danger but life.[MAM99, p.80]

The condition of confidence, heroic or not, to be actual, must somehow not deceive too much, and it would be naive to think that intuition never deceives us. Nonetheless, Mamis is right, intuition is a critical component in any decision process, not less in a trading context.
Technical analysis is very nice, but if fractal geometry teaches us anything, it is that we cannot foresee the evolution of complex processes on the basis of objective knowledge.
Now, if intuition deceives us, I contend that it is because it is trained to do so: Our whole education has conditioned us to think in deterministic terms, the analytical mind is praised and rewarded, hard sciences have simply excluded complex systems from their scope for centuries, and these systems are hardly touched at all in a normal education before a specialized Masters level even today.
Despite that, hard sciences and the mode of thinking they promote, are the foremost influence we are exposed to during our formal education. We are all members of the church of scientism, those who are not are likely to be members of churches even more deterministic than this one.
And our intuition follows this fold, even when we lack information to make a decision (which is almost always the case), we will tend to over-rely on the ones we have, and decide solely on this basis, extrapolating linearly from this partial knowledge, because we are conditioned to rely on linearity. We are simply unable to recognize, acknowledge and take into account the non-linearity of a process. It is this ability that must be developed over time, and it is this one that shall be called an efficient intuition.

There is one domain of the culture that may provide us with a way to build up this intuition, and that is Art. To each his own, personally, I am more sensitive to music and poetry, and it is therefore along these lines that I will argue my point, but I believe it can be transposed to other arts.
Adorno's critic of Schoenberg's and Stravinky's music links them both to the political and philosophical problematic of their times:
Art, indeed, always happens in a context, and relates to it in a very essential way, furthermore, it always takes on a problematic and resolve it figuratively. When Bartok or Stravinsky rejuvenated classical music with peasants songs, they merely reacted to the standardization of the world along western romanticist lines. But more than that, they provide us with a solution to the problematic of cosmopolitism, the native cultures don't have to be erased, they can be consolidated within an evolving culture (civilizations don't clash, they merge, sorry Mr.Huntington) and contribute to a manifold society (see the cosmopolitanist philosophy of Kwame Anthony Appiah for instance). The european empires could have used a bit of insight from them in the 20s and 30s.

And the same goes for today, here is a piece by Iannis Xenakis: Metastasis
The 1st and 3rd movement deals with a relativistic notion of time, that is a function of energy and mass. Interestingly, in trading, Mandelbrot defines the concept of trading time, which is also a function of what can be compared to energy and mass, and that is volume. That is actually a reflection of the dependence of the Hurst-Holder exponent to time [MAN97, pp39-40].
The second movement is even more interesting since it gives a musical translation of Fibonacci sequence.

Xenakis also wrote pieces dealing with Brownian Motion, Normal Distribution and Statistical Mechanics, all very interesting pieces. What they provide us with is an acquaintance that goes beyond the mere knowledge of well-defined criteria, an intuition that may articulate our decisions in a more efficient way.

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