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The Power of Decision Making- Part II

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Quote “Good decisions come from experience. Experience comes from making bad decisions.” – Mark Twain

As we continue our journey looking into the Power of Decision Making let’s begin by recapping what we discussed in the last newsletter. Have you thought yet about YOUR decision making process about risk? What about how or if your decision making changes when mental strain or financial pressures arise? We know that decision making is a cognitive process that results in some sort of action based on several choices in which every decision ends in a final choice. We also discussed what is called the availability heuristic or the “probability of an event based on information the mind can retrieve”.

We probably saw this happen just recently during the floods in Colorado, what some are calling the “Deadly Colorado Floods” , “The Rainstorm of the Century”, and :The Rainstorm of Biblical Proportions”. This system of rain that began on September 11, 2013 covered most of Colorado’s Front Range with flooding in areas including Boulder, Lyons, Fort Collins, and many other communities. Sadly this storm has claimed the lives of many people. With all the coverage from the news stations and the National Weather Service what information did you take from this event and did it change or alter your business decisions? I am curious, have you watched to see if you are making decisions based on what you have been told or have seen using Availability Error? Or using Anchoring Bias?

We just slightly touched on group decisions and how making a quick risk management decision can get swayed by what maybe another feed yard manager is doing. Let’s discuss this in some more depth.

When we are in a group there is a high probability that the group can have a powerful effect on us and our decision making. Think about the types of groups that you belong to or are affiliated with? Whether it be a small neighborhood of friends that get together for football or social events, a political group, church group, or are a part of the group on the trading room floor; members tend to make decisions based on various group dynamics. How a group behaves, how leaders emerge, and decisions are coerced begins to shape what is called our social identity.  Also, at what point does conformity happen and are you one that ends up conforming to the rules and decisions of the group? In groups where the members share similar backgrounds, values, and goals, they are quick to adopt majority decisions. This theory is what psychologists call groupthink.

Mike Elvin, author of Financial Risk Taking goes on to explain that Traders are generally aware of the conformity factors of groups and that belonging to a group also has implications and the interactions between members can effect attitudes and behaviors towards other groups ( p. 138). Elvin goes on to discuss how members will become accentuated to the prevailing attitude in the group; such as a group of traders who have an affiliation with a specific theory will see their methodologies and techniques superior to other methods used by other groups and/or people. Which theories or methods do you use in managing risk and how did you come to use that particular method? Imagine that you covered your short futures hedges because your fellow feed yard peers had said they were not hedged because they were BULLISH on fed cattle prices. This phenomenon is called the risky shift. “It is comforting to belong to a cohesive group of traders showing a common philosophy, discipline, and method of trading.” (Elvin, 140).

Accepting loss and aborting decisions are part of our daily lives. Realizing that you did not win the lottery from the ticket you just bought or deciding to forgo the family vacation that has been planned for a year are decisions that we make. Elvin discusses this in its relation to trading in reciting the Golden Rule “If the market does not conform to your plan or your original reasons for making the trade, then close your position” (56). What is your method of placing a stop loss? Elvin goes on to describe his work with Dr. Richard McCall and his teaching of a successful market trader. “The person who faces and accepts the intrinsic risk in a given situation has also accepted all possible losses he might occur” (52). What strategies do you use when accepting a loss? How do you cope with loss? Does anger, denial, guilt, depression, acceptance change your decision making process in future hedge positions?

As quoted above by Mark Twain, “Good decisions come from experience. Experience comes from making bad decisions”. Accepting loss and learning from experience and the mistakes made in the past 39 years as a broker is something Larry talks about and has helped him outline the 3 Strategies: Profitability, Price Risk or Opportunity, and Basis Risk or Opportunity. Larry says “Locking in a $15.00/hd profit and riding out margin calls to end up with what could have been a $50.00/hd profit is still a good risk management decision. There will also be times when protecting a $50/hd loss was a good risk management decision over the actual $250/hd loss. This has been the case over the past summer.” The ultimate outcome is have the risk management decisions I have made keep me financially liquid and still in the cattle feeding business. Are the poor decisions I have made that cost me money much less proportional to the good decisions I made that maintained or built EQUITY! Have I learned from my mistakes and written the disciplines into my Hedge Policy!

Again I would like to end Part II of The Power of Decision Making on asking you this: What decisions have you made over the past few days and what influenced your process of taking or avoiding risk.

To be continued….

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