In honor of the late great Let's Make a Deal host, I offer some good and fun reasons to learn more math. Please pick a time stamped topic below:

This episode is all about the risk and reward of decision-making. Sometimes we avoid making decisions, and often we never learn from our bad ones. I was fortunate that I became a high-frequency currency trader 20 years ago and learned how to make lots of decisions every hour that I could never regret, and only learn from. But that doesn’t mean I don't still fall prey to the bad habits we all have when faced with uncertainty and risk.Please pick a time stamped topic below:

(0:20) – Risk-Reward Analysis for Better Decision-Making

(2:40) - The 6 Pillars of Great Trader Behavior

(6:00) - Behavioral Finance and Neural Science: Your Brain Isn't Meant To Trade

(11:00) - Peter Diamandis and Steven Kotler's Book, Abundance

(19:30) - Biotech Stocks: Gilead Buys Kite Pharma

(24:30) - Why Kevin Sold JUNO While Its Still On The Rise

(32:00) - Episode Roundup: Podcast@Zacks.com

(0:40) - Automation Puts a Billion Jobs in Danger

(2:00) - Big Economic Disruption: Big Data, AI and Robotics

(3:40) - Is the Industrial Revolution Coming To An End For China and India?

(6:10) - Where are the Investment Opportunities?

(10:30) - IBM and Nvidia

(13:00) - Elon Musk: Neuralink

(16:30) - Biological Evolution: 3 Must Read Books

(19:45) - Yuval Noah Harari - Homo Deus

(27:15) - Episode Roundup: Podcast@Zacks.com

The Evolution of Risk-Taking

Trading is one of the hardest day jobs in the world – what drives those who succeed at it?

Welcome back to Mind Over Money, I’m Kevin Cook, your field guide and story teller for the fascinating arena of behavioral economics.

Today my guest is a PhD candidate from the University of Greenwich in London who is studying the risk-taking behavior of traders from the perspective of evolutionary psychology.

Belinda Vigors wants to know if successful traders are doing anything different when making decisions under uncertainty and stress than us mere mortals who wrestle with our cognitive biases and unknown depths of neurochemistry and neuro-circuitry that drive our emotional habits.

Before we meet Belinda, I want to give you some background for our discussion that is actually causing a rift in the field of behavioral economics, at least for those of us who apply it to markets and trading.

I have been a long-time fan of Daniel Kahneman -- who is the only psychologist ever to win a Nobel Prize -- for his work on decision making under uncertainty and risk. He practically invented the discipline of behavioral finance.

And the cognitive biases that he has discovered and named over 4 decades have given us a rich vocabulary with which to talk about people (and traders) acting stupid and irrational with money and risk.

Since I am also an eager student of neuroscience, I simply look at the two fields as different but complementary ways of describing and understanding decision making. As I like to say, the behavioral gang studies us from the OUTSIDE-IN, while the brain gang studies us from the INSIDE-OUT.

An Affinity for Randomness and Ambiguity

But Kahneman’s 2011 book Thinking Fast and Slow has caused some extra controversy in the twilight of his long career because he may be not only oversimplifying how our decision making works, but also limiting any believer’s choice of solutions or therapies.

In other words, his System #1 and System #2 for thinking -- the fast and emotional vs. the slow and rational, respectively -- don't appear to integrate with the findings of brain science very well, which would argue for much more complexity especially as emotion and neurochemistry are concerned.

Kahneman also no longer likes describing humans as “irrational.” But then how do we explain all sorts of self-sabotage regarding money, risk and long-term goals? Or, how about truly self-destructive behavior like crime and violence?

And Kahneman’s theories are not based on any clinical work in helping people or traders change their thinking and decision-making. Since I did not read Thinking Fast and Slow, in today’s podcast I share a quick review by a thoughtful investor who explains quite well why the theories may be very limiting.

Ravee Mehta, a portfolio manager and author of The Emotionally Intelligent Investor: How Self-Awareness, Empathy and Intuition Drive Performance, says that Kahneman’s systems miss much of the significant skill, discipline, and what I call an “affinity for randomness” that traders can develop when they become more aware of their emotions and intuition.

Here’s an excerpt from Mehta’s 2012 blog, “Daniel Kahneman is Wrong (at least when it comes to investing)”...

I humbly disagree with Kahneman, a Nobel laureate, and some other prominent psychologists when it comes to “fast-thinking” and investing. They argue that the stock market is too complex and random for intuition to be developed. They believe that the randomness causes people to build incorrect association biases. This argument is flawed.  While the overall market may seem complex and random, there are many patterns within it that recur frequently. The best money managers recognize patterns developing ahead of most. They also can develop useful intuition because they are honest with themselves about the role luck had in their success.  The intuitive decision-making that is involved with investing is much more complicated than other types of decision-making. However, that does not mean that we should abandon trying to better develop and use gut instincts when we invest.

The Evolutionary Path of Trader Brains

Cognitive biases, emotional habits, and intuition are definitely interesting. But what really gets me excited is talking about how our brains work. And that invariably leads to discussions about our evolution.

So I was really excited to bring in a young student of this complex collision between behavioral science and of one of the hardest jobs on the planet, trading.

Belinda Vigors explains how traders may be dealing with risk in terms of “need thresholds” and survival goals. She bases part of her theories about emotion on the work of psychologist Jennifer Lerner of Harvard whose research examines the distinct effects of fear, anger, and happiness on risk perception and risk preference.

Be sure to listen to the podcast to hear my full conversation with Belinda.

Kevin Cook is a Senior Stock Strategist at Zacks Investment Research where he runs the TAZR trading service.

Today marks the kick-off edition of Mind Over Money, the only podcast that exposes the psychology of investing. I’m Kevin Cook, your field-guide and story-teller for the fascinating arena known as behavioral economics, which includes the sub-field behavioral finance and also draws in the related research from neuroscience, where brain imaging “sheds light,” if you’ll pardon the pun, on how we make decisions about money, uncertainty, and risk.

Jason Zweig described these merging fields in his 2007 book Your Money & Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich.

Zweig, as you may know, wrote for Money magazine for years and was the editor of the revised edition of Benjamin Graham’s The Intelligent Investor. He now writes for the WSJ. So he wasn’t just a journalist describing an investing fad. He’s schooled in classical investing methods and knew he was on to something of enduring importance when he either coined, or at least put on the map, the term “neuroeconomics.”

He opens his book, which I consider must-reading for all students of the market, this way…

“How could I have been such an idiot?” If you’ve never yelled that sentence at yourself in a fury, you’re not an investor. There may be nothing across the entire spectrum of human endeavor that makes so many smart people feel so stupid as investing does.

But actually, I didn’t discover Jason’s book until about 5 years ago. And I had been working on the same ideas as him prior to the financial crisis. In fact, I published part of my thesis that “Your Brain Wasn’t Made to Trade” in 2008 in an industry magazine called SFO, which stood for Stocks, Futures, and Options.

My objective with Mind Over Money is to inspire you to be nearly as interested in behavioral economics, behavioral finance, and neuroscience as Mr. Zweig and I both are. And of course, we both give you plenty of other experts and resources to aid in that endeavor. That’s because so many great and dedicated researchers came before us and created the invaluable insights of these fields.

My unique contribution is that before I discovered behavioral finance or became passionately interested in brain science, I was studying great traders and terrible traders, through their successes and their failures, on the trading floors of Chicago since the mid-1990s.

This Is Your Brain on Risk

There are a lot of forces and players on Wall Street that can separate you from your money. But our greatest financial enemy is often ourselves.

Three great areas of study give us insight about this self-sabotage: behavioral finance, neuroscience, and the collective wisdom of great investors and traders who discovered through hard-won experience what those two sciences now teach us.

When we study these areas, we can become more aware and better equipped to spot how our own minds and habits either get in the way or help us make better decisions when it comes to money, uncertainty, and risk.

One group of researchers studies people from the outside-in, the behavioral finance group, who owe much to the ground-breaking work of Daniel Kahneman and Amos Tversky in the 1970s.

The other group, the neuroscientists, studies our behavior from the inside-out, as they pinpoint what brain structures and functions are involved in different types of decisions and responses.

What happens when our minds meet markets has been a passionate area of interest for me for over 20 years, ever since I first walked on the trading floors of Chicago and watched the good, the bad, and the ugly among professional speculators.

So how did I come to the conclusion that “your brain wasn’t made to trade?” It’s a bold statement. But once I show you the evidence behind it, I bet you will agree.

The Era of Rogues and Geniuses

In 1995, when my trading career was first getting started, the oldest bank in the world collapsed because of the rogue actions of one employee. Founded in 1762, Barings Bank was wiped out by trader Nick Leeson who was taking on exceptionally large trades – and losses – in Japan’s Nikkei futures market.

And he was able to hide them for a time until the risk managers finally woke up and started to notice that accounts were not balancing.

At the time, it seemed people everywhere – from journalists and regulators to traders, bankers, and the man or woman on the street – were all shocked that something like this could happen.

I started tracking stories like this, especially as they seemed to be occurring more often. In 1998, we saw the biggest hedge fund failure ever – up to that time. It is dwarfed by comparison since then.

Long-Term Capital Management had to be bailed out by 16 Wall Street investment banks, in a campaign orchestrated by the Greenspan-led Federal Reserve, because their losses in interest rate sensitive markets around the globe were viewed as threatening to financial markets.

The bailout at over $3.5 billion is considered paltry by today’s “too big to fail” standards. But the truly notable dynamic was that the fund was run by some of the smartest minds on Wall Street, like Myron Scholes who had just won a Nobel prize in Economics the year before.

I also kept track of the big blow-outs I witnessed in the trading pits in Chicago. New floor traders would always come and go on a regular basis. But the surprises came when a 20-year veteran would suddenly vanish because he took exceptional risk that went way wrong and wiped out a multi-million dollar account.

Rogues, Gamblers, and Wizards: What can we learn from them?

As I watched the rogues and the blowouts, I also read about the great traders. Jack Schwager’s books about the Market Wizards are really required reading for anyone who wants to become a full-time trader. They are in-depth interviews with big successes like George Soros, Paul Tudor Jones, Michael Steinhardt, and options wizards like Blair Hull.

As I read these dozens of interviews across 3 of Schwager’s books, I found six themes all these great traders and investors had in common. I’m going to list them for you because even before I had ever heard of behavioral finance or became interested in brain science, these “street-smart” winners had cornered the market on the principles of being in command of their own minds and trading behavior:

1.    Psychology: emotional decision-making was a paramount discovery

2.    Discipline: having lost big without them, rules became lifesavers

3.    Risk Management: the “golden rule” is to cut losses quickly and let winners run

4.    Probability: repeatable methods & mechanics of risk/reward evaluation

5.    Consistency: steady compounding was better than windfalls and wipeouts

6.    Systems: putting the first 5 together in routines of planning & preparation

When I became a professional currency trader in 1999 upon the introduction of the euro, I noticed that even bank traders were an emotional and irrational bunch. As I studied the two sciences, I concluded that our brains were “hard-wired” to break the “golden rule” of trading.

In other words, our fear-driven, excitable, and emotional brains preferred (1) to avoid losses at all costs (so we would only take them when it was almost too late) and (2) to take gains quickly. This irrational and upside-down approach to risk/ and reward was the mathematical road to insolvency.

So I started researching how to train “trader brains” and I developed a probability simulation called Masters of PROP: Probability, Risk, and Optimal Profit. That trader training never goes out of date because its subject material, human brains, remain irrational, decade after decade.

Is It All Just About Greed?

So if the Market Wizards principles of the world’s best traders and investors worked so universally, what were the rogue traders and reckless fund managers doing – just the opposite?

Well, it’s a little more complicated than that. Because while there might be a half-dozen ways to do things right, there are many dozens, if not hundreds, of ways to make our money go away.

What always gets highlighted with rogues and “geniuses” that fail is that they were just greedy. But as I put together my thesis that “Your Brain Wasn’t Made to Trade” in the early 2000s, I came up with 3 more distinct and important drivers of financial bad behavior…

#1: Ego and the desire to be seen as “the great trader.” This was evident in so many of the rogue trader stories, like John Rusnak accumulating $700 million in losses for Allied Irish bank between 1997 and 2002.

#2: Irrational or immature beliefs about money, success, self-worth, and happiness such as “I deserve it!” or “This needs to happen now!” or “Once I win this back, I’ll make everything right again.” This kind of stuff tends toward either unconscious or full-blown narcissism with lots of emotional immaturity in between.

#3: Ignorance or lack of skill with probability

The primary reason I think we gain so much from studying rogues and other reckless gamblers is because what the rogue does to a billion dollars of other people’s money, we can do to our own accounts if we are not aware of our mental habits and cognitive biases as they impact our decision-making with money and risk.

And here, I have a confession to make.

While I could be as guilty as any investor-trader of any of these faults, the one I knew I had to immediately do something about was Probability. As a trading floor clerk in the late 1990s, I realized I had to make up for my lack of understanding and skill with probability.

And since equations were not my favorite things in high school or college, I found that the stories of how probability was invented and how it was used – in the options markets, in Vegas, in sports, and in weather modeling – pulled me in and gave me a practical way to learn the math I needed to know.

I must have read the stories of how Pascal and Fermat invented modern probability theory in the 1650s a dozen times before it started to sink in and I could make sense of all the equations that came after.

But you’re probably still wondering where I get the nerve to say Your Brain Wasn’t Made to Trade?

It’s all in this week’s podcast.

And be sure to check out my weekly video where I expose the psychology of investing with behavioral and cognitive biases. My most recent gives a great example of mental accounting.