The Quality of Our Decisions Part 2

In ‘Think Better’, author Tim Hurson suggests a business decision-making model that evolves my process. Firstly he suggests that we alternate between right-brain and left-brain activity; secondly within his seven step model, he has some very useful tools. Whenever I brainstorm I use Mind Mapping software called Mind Manager. A free version of a mind mapping software can be found at:

http://freemind.sourceforge.net/wiki/index.php/Download

Let’s consider an example and let’s say we are looking at yesterday’s ESZ7 12-m (yearly trend). We’d start with his first step, the one he calls: “What’s Going On”? Here he aims to use the right-brain to identify the critical factors. In our case we’d be brainstorming to probe for the factors that will affect the probabilities of our trade. A couple of useful questions he uses are:

  1. What’s the Itch? And
  2. What’s the Impact of the Itch?

Once we have a list, he suggests we verify our ideas by asking: “What the Information?” and drawing a distinction between what we know and we interpret. This is a useful distinction. For example:

Yesterday in the ES we had a directional day on lower than mean volume; the Profile showed a 3-i day down. That’s what we know. I’d interpret that by saying that the directional day favoured more downside to come; the lower than mean volume suggested the down move was coming to an end and the 3-i day suggested that in the 1st 90 minutes of trading, if we sold above the value area, we should be able to at least scratch the trade.

One of the questions that immediately arise is: “What does it mean if today we don’t get free exposure?” Another question would be: “What does it mean if today, we fail to make a lower low?” etc. In drawing a distinction between what we know and what we postulate, we are more likely to trade with an open mind: the process stimulates our ideas and reduces the risk of myopia – seeing only what fits our pre-conceptions.

Once we have a list of possibilities, we fine down to one or more critical questions that the Trader’s Timeframe will need to answer (in yesterday’s post the 18-d). The questions are answered by creating scenarios and assigning probabilities. We’d then use Decision Tree software to arrive at a solution. When using the software I like to see the conclusions hold over a range of values. If the Decision Tree software changes its decision over a narrow range, I consider it too close to call.

The attachment is the example I use on the video on the Decision Making Process. In that Tree, a change in the probability of success from 12.5% to 21.4% altered the decision. I would consider that too close to call and would stand aside.

Decision Tree

DECISION TREE

For a free Decision Tree Software go to:

http://www.visionarytools.com/downloads.htm

Tim Hurson’s book is a great read and one I think you’ll find useful – but you will need to adapt some of the ideas to trading.

2 thoughts on “The Quality of Our Decisions Part 2”

  1. Wish to add from what Ray said here:
    “The questions are answered by creating scenarios and assigning probabilities. We’d then use Decision Tree software to arrive at a solution. When using the software I like to see the conclusions hold over a range of values. If the Decision Tree software changes its decision over a narrow range, I consider it too close to call.”

    Decision Tree softwares can also be applied in arriving at a decision to take any business project, eg a musical benefit project, my pet and possible swan song!

    It enables my right brain to brainstorm whether the project I have in mind has any viable outcome, before I can proceed with my left brain to put the project through its conclusions.

  2. More about Decision Trees:

    When compared with Wave Theory: Quote
    The worst interpreters of the theory are those who view it as an art to be “painted” with their own impulsive or imprecise “interpretations.”

    …….it probably takes an artistic mind to do it well, because the market draws pictures, and you must decide if they are proportioned correctly enough to call them completed. There are types of minds that are rational yet unsuited for this task.

    Unquote.

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