Why Psychology Matters Every experienced trader agrees that psychology is a critical factor in successful trading. But I'd go even further... I believe psychology is the only thing that matters in trading. Ironically, this is not a lesson professors will ever teach you at Harvard, Stanford or Wharton Business School. The reason is simple. Until very recently, the investment curriculum completely ignored psychology. By arguing that 100% of investors were 100% rational 100% of the time, academics assumed psychology away. Psychology was a black hole. And no financial economist was willing to crawl down to see what was there. That changed in the watershed year of 2002. That was the year a psychologist, Princeton's Daniel Kahneman (in work he did with Stanford's late Amos Tversky), earned a Nobel Memorial Prize in economics. The irony? Kahneman had never taken a single course in economics. Kahneman and Tversky's work questioned the assumption of homo economicus, the perfectly rational actor who appeared in textbooks but never in real life. Kahneman and Tversky uncovered a slew of psychological biases. Together, these biases make individual decision making irrational. Unwittingly, Kahneman and Tversky gave birth to the new discipline of behavioral economics. (You can learn more about their remarkable story in Michael Lewis' The Undoing Project: A Friendship That Changed Our Minds.) As it turns out, the founding fathers of modern financial theory are just as irrational as the rest of us. Harry Markowitz - the University of Chicago economist who developed the infamous "efficient frontier" in modern finance - never used his Nobel Prize-winning idea in his own investing! Of course, the world's best have long known that psychology trumps financial models. You need to look no further than Warren Buffett. Buffett described Benjamin Graham's 1949 classic, The Intelligent Investor: The Definitive Book on Value Investing, as "by far the best book on investing ever written." Buffett credited Graham's discussion of the manic-depressive "Mr. Market" as the single most important thing he had ever read. Understanding Mr. Market's irrational mood swings gave Buffett a massive edge in timing his investments. The world's top hedge funds also understand the importance of psychology in investing. That's why they employ trading psychologists to coach traders, in the same way that top athletes hire sports psychologists. The late psychiatrist Ari Kiev was a mental health coach to all of SAC Capital Advisors' top traders. In the television show Billions - which is inspired by the story of Steve Cohen and SAC Capital - Wendy Rhoades is the in-house psychiatrist and performance coach at the fictional Axe Capital. My one recommendation for you today is not a red-hot stock pick generated by my quantitative Oxford Swing Trader system. Instead, it is to invest your time to focus on your psychology and how it relates to investing. Start by completing trading coach Van Tharp's free online investment psychology profile. Once you complete it, you'll have a much better idea of what kind of trading and investing suits you. Psychology is rarely the place where successful traders begin. But it is the place where all successful ones end up. Good investing, Nicholas | 
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