In this, my final post on Geoff Colvin’s Talent Is Overrated, I’m going to delve into the mysterious world of memory. My takeaway won’t be so much about theories of memory as about the simple but powerful concept of “chunks,” because I think this has particular relevance for the trader.
An initial research finding was that when it came to short-term memory, everyone remembered roughly the same number of chunks, but the chunks were of different sizes. Novices had tiny chunks and masters had large chunks. This resonated with me in a psychologically positive way. I have never been able to get beyond page 2 of any bar-by-bar analysis; I simply don’t process data on a unit basis. Colvin says kudos to me. The difference, he claims, “is much like the difference between letters and words.” Assume that a test subject is shown the thirteen letters l-e-x-i-c-o-g-r-a-p-h-e-r and asked to remember them in the correct order. This is an effortless task for a person who knows the word and a virtually impossible task for the person who doesn’t (we’re good for only about seven letters).
Top-level chess players don’t see 25 pieces on the board; they see five or six groups of pieces. Moreover, in their working memory (which allows them to access long-term memory quickly and accurately) “good club players have a ‘vocabulary’ of about 1,000 chunks, while the highest-ranked players have a vocabulary of 10,000 to 100,000.” (p. 100). The amazing memory of chess players “is based on more than just an ability to perceive pieces in groups. The best players also understand the strategic importance of each group, its role in attacking, defending, and distracting the opponent, and so on.” (p. 102)
Parallels to discretionary trading are obvious. For instance, for the chartist patterns are “chunks” that need to be stored in long-term memory not merely pictorially but strategically as well. The trader has to be able to access these chunks quickly and accurately as the trading day unfolds. And I would wager to say that the master trader has more than generic patterns stored away. A symmetrical triangle, for instance, comes in many forms depending on what has preceded it and how symmetrical it really is. So while the novice extracts the “symmetrical triangle” chunk from his long-term memory, the expert extracts “symmetrical triangle 103 or 174.”
If this description is at all accurate, the discretionary trader has to invest a lot of time into his training. He has to be able to distinguish triangles the way Revson could distinguish shades of black. He has to remember a phenomenal number of chunks and know when to call on them in his trading strategy. And he has to be able to defeat Deep Blue (in this case, algorithmic trading) often enough to make a profit.