"It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent."
- Charlie Munger
Welcome to Mental Models For Wall Street.
On this course we are going to investigate a number of mental models and how they can help you win in finance and business - particularly in the realm of trading and investing.
You are going to discover crucial models and frameworks like:
- The Availability Bias
- Confirmation Bias
- Misconceptions of Chance
- The Black Swan
- The Law of Small Numbers
- Cognitive Dissonance
- Margin of Safety
- Aversion to Losses
- Feedback Loops
- And lots more...
Financial traders, investors and entrepreneurs will benefit most from this course as we delve into topics that will teach you about yourself, improve your judgement skills and insulate you from costly mistakes.
For example, by learning about psychological models like confirmation bias and hindsight bias you will be better equipped to eliminate their negative effects and make better decisions in the stock market.
By learning about cognitive dissonance, anchoring and fear of missing out you'll finally understand why you sometimes make strange, illogical decisions. And how this can help you in the trading world.
Concepts such as circle of competence, margin of safety and Mr. Market will further help you to make better timed investment moves while protecting your downside risk.
Also, you will learn to calculate better probabilities using Bayes Theorem, improve your systematic processes using feedback loops and minimise overconfidence by understanding concepts such as regression to the mean.
You will learn all this and more – by utilising the power of mental models detailed on this course!
But, what is a mental model?
Well, a mental model in it’s simplest form is an idea that helps us understand how the world works.
Having a large array of these models at our fingertips gives us great tools we can use to solve problems and navigate life.
Why do we need mental models?
The world is complicated so you can’t rely on just remembering facts, you need to have multiple models from all different disciplines in your head.
But even though there is so much to learn, there are shortcuts we can take.
By studying the big ideas from the big disciplines. Disciplines like psychology, economics, maths, physics and engineering we can go a long way in a short amount of time.
And that’s the whole concept behind Mental Models. They're shortcuts you can take to speed up your learning and become knowledgeable about the world.
The focus of this course
On this course, we will look at the most important mental models, the ones most crucial for success. And we will relate them to the business of financial trading and investing.
These models will help you to make better investment decisions, solve complex problems and avoid costly errors.
Explains the structure of the course.
A quick introduction to the course material.
Some wise words from Charlie Munger (Warren Buffett's business partner).
Some quick tips for taking the course.
What is the best way to learn? How can we find truth?
A mental model that says we remember things better when they arrive in a vivid narrative.
A mental model that details our inability to assign correct probabilities to independent events and how that impacts trading and investing decisions.
We tend to interpret new evidence as confirmation of our existing beliefs or theories. This can cause us problems in decision making and in trading.
Small data sets are more vulnerable to randomness and can be misleading.
Randomness cannot always be quantified or accounted for.
When we look back in time and see events as more predictable than they were at the time.
We learn by studying and refining our beliefs and behaviour as we gain more information.
A mental model that says when people make quantitative predictions, their predictions are often heavily influenced by previous values that they may have seen or remember.
Extreme outcomes are often followed by moderate ones.
Time for a break. Grab yourself a cup of tea and listen to some music. The course will resume shortly!
People find losses more painful than they enjoy equivalent gains.
People tend to ascribe more value to things merely because they own them and how this can impact investment decisions.
A model that describes the state of having inconsistent thoughts, beliefs, or attitudes.
First principles is a physics way of looking at the world. You boil things down to the most fundamental truths.
A method used to reduce the chance of a process or system failing and very useful for investing.
The availability of a particular product and the desire (demand) for that product affects its price. This is a fundamental economic law.
Feedback loops occur when reactions affect themselves, and there are two types; positive feedback loops and negative feedback loops.
When faced with two equally good hypotheses, always choose the simpler option.
The idea that the universe is not linear but full of systems that are complex and constantly adapting to their environment. The stock market is a good example.
You should concentrate on areas you know a lot about, since it is impossible to be an expert in everything.
You should view the market as a kind of manic-depressive business partner called Mr Market.
Anxiety that an exciting, interesting or profitable event may currently be happening elsewhere, often aroused by posts seen on a social media website.
In this lecture I look at some mental models relating to my own experience with real-life examples so that you can learn from my own mistakes.
In this lecture I apply mental models theory directly to some price charts.
Just some final words and concluding remarks.
Recommended reading and resources for the course.
A bonus lecture containing a list of even more mental models.
The Mental Models eBook/script.
Joe B Marwood is a trader and investor specialising in financial trading and mechanical trading systems.
He began his career trading stock and bond futures for a prop trading firm in the UK and now works through his own private company.
How did you get started?
I started my career as a professional day trader for a UK-based prop firm where my principal products were the FTSE 100 future and German Bund.
Today I trade a portfolio of individual stocks and occasionally futures and I have a passion for building automated trading strategies and systems.
What is your trading style?
I use a mechanical strategy to trade on a largely end of day basis. I look at both fundamental and technical analysis and use strategies that are based on historical simulations. I often combine those strategies with my own experience and discretion to come up with trades that I believe are the most attractive on a risk/reward basis.
Mean reversion or trend following?
I have found that traditional trend following methods do not work as well as they once did. My methods are based on my own observations on the market whether they are based on momentum, trends, mean reversion or anything else.
Who taught you how to trade?
My mentor was a former head of trading at a well known German investment bank. I have also read and studied countless books, journals, and articles, and have spent many hours in the market. You can never stop learning.
Why did you make this course?
To educate others so that they don't make the same mistakes I made. Learning to trade can be a very expensive and drawn out process. As a trader, it is also extremely beneficial to have sources of side income as that takes the pressure off your own trading. Putting what I have learnt into a course also solidifies my own learning.
What are the secrets to successful trading?
First of all, you must have the passion to succeed. If you are in it only for the money you will have a very tough time and will be doomed to failure. You must also be comfortable with risk and be able to separate your emotions from the money. Having a system with a profitable expectancy is also crucial and for that you will likely need a strong ability with numbers.
Why do most traders fail?
Most traders start off under-capitalised and then chase unrealistic returns which results in them blowing their account after a couple of big losses. Most beginner traders do not realise the realities of trading which is why they have trouble sticking to trading plans and dealing with their emotions. Trading should be treated as a business.