Look to falsify

Human nature is to confirm. Most people look to find evidence (and arguments) that confirm their view/position. The confirmation bias is so prevalent in our fundamental psychology that its quite crippling when it comes to aligning your perspective to reality.

This confirmation bias is embedded in our human nature and our thinking, countless studies show that we unilaterally look toward the “evidence” that proves our views while avoiding the evidence that disproves them.

Someone who trades in markets should know that they have a high probability of being wrong, and that figuring out if you are wrong is much more important than figuring out if you are right. If being right is the goal, you will blind yourself to the majority of evidence that proves you wrong while selecting the evidence that confirms your view. However, if being wrong is the “goal” then you will seek out the information that proves your view wrong.

A trader makes money (all else equal) when he is right and loses money when he is wrong. To be profitable we need our winnings to exceed our losings. We measure with Reward/Risk and the percentage of the time we are right; giving us our expectancy.

“The whole secret to winning in the stock market is to lose the lease amount possible when you’re not right.” – William O’Neil

A trader needs to know when he’s wrong, so he can exit a position and take the loss. He also needs to know when he’s right, so he can realize profit. The tricky part is knowing. To maximize our profits we minimize our losses, by focusing on when we are wrong.

My view is that by moving away from the norm of verification toward falsification, we may improve our judgement.

Who knows.

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