Todd Simkin on overcoming cognitive biases by communicating well with the right kind of group

Shane Parrish interviewed Todd Simkin, of Susquehanna International Group, for his Knowledge Project Podcast.

One of the topics that they discussed was cognitive biases and strategies to keep them in check. Simkin explains that at Susquehanna they train traders to talk over their decisions with others in their teams:

Parrish: What I don’t like about cognitive biases is that they seem to be poor at preventing us from making poor decisions in the future. What I do like about them is they seem to offer a language and a framework for thinking about why we’ve made poor decisions in the past. So how do you use that information to make better decisions in the future?

Simkin: It is definitely true that [having knowledge about cognitive biases is] sort of descriptive of the past. A lot of these heuristics and biases are things that we can see after we’ve already identified that a mistake has been made. And we say, “Okay, why was the mistake made?” Say, “Oh, because I was anchored.” Or “Oh, because of the way the question was framed.”

Whatever it might be we have a really hard time seeing it in ourselves, but a really easy time seeing when someone else’s is making that type of stupid mistake.

A big part of our approach to education [at Susquehanna] is to teach people to talk through their decisions, and to talk about why they’re doing what they’re doing with their peers, the other people on their team.

If we can do that real time, that’s great. Often in trading, you don’t have that opportunity, because things are just too immediate.

But certainly, anytime things have changed, if you’re doing things differently, it’s a really good time to turn to the traders around you, and the quantitative researchers around you, and the assistant traders and your team. And say, “Hmm, it looks like all the sudden Gamestop is a whole lot more volatile than it was a week ago. Here’s how I’m positioning for this trading. What do you guys think?” And have someone say, “Oh, it seems like you’re really anchored to last week’s volatility. If things have changed that much, you need to move much more quickly than you’re moving right now.”

So you don’t realize that you’re anchored, that’s the whole nature of being anchored, is that you don’t recognize the outsized importance that the anchor has on your decision. But somebody else who’s a little bit more distant from it can.

So if we’re good at at encouraging the communication, then we’re going to be really good at getting other people to to help improve your decision process.

Simkin believes that the ability to “bring in other people to the decision process in a constructive way” is the most important success factor for a trader:

Parrish: Is it fair to say that probabilistic thinking is probably the biggest bang for the buck when it comes to improving your decision making ability? If you had to isolate the top three variables that you could teach somebody to improve their ability to see reality (or to do “truth finding”), what would they be?

Simkin: Talk more is number one. That beats probabilistic thinking that beats sort of anything else in truth finding. It is being able to bring in other people to the decision process in a constructive way. So finding good ways to communicate, to improve the input from others in your decision process, I think is pretty important.

Thinking probabilistically, I think, is definitely a very, very important piece of that [as well].

I’m trying to sort of diagnose this, [to think about] what works, by trying to think of where things fall apart, where people fail. The other place that people fail is really falling in love with their decision process, and not being open to being wrong. So in openness to feedback, to finding disconfirming information, to actively seeking out disconfirming information, which is really uncomfortable. But that, I think, is the other piece that is super important for being a good trader.

But of course nothing is completely failproof:

Simkin: I know that you [Shane Parrish] are fond of pointing out that “you are the sum of the five people that you spend the most time with.” So if the people that you’re spending the most time with or your co-workers who are thinking about trading the same way you are, then maybe you’re going to combine the same types of errors. [Nevertheless] that is certainly better than then trying to act on your own.

It is also essential to watch the team dynamics to make sure it’s geared towards truth seeking (and not politics, nor “action”):

Simkin: And [it’s] even better if you have a culture that rewards truth finding, as opposed to rewarding action. If nobody feels personally attacked, because of somebody else pointing out their error, but instead feels like “We together have now done more to get closer to some truth.” [That’s a] better way to act. The more accurate, fair value of this asset that we’re trading, [the more] everybody feels like it’s a win. And they will therefore encourage the involvement of the people around them.