A while back I asked the question of whether or not you were an instinctual trader. To find out you were asked to click a link and play an online card game. The game is called the Iowa Gambling Task (IGT) and was developed to simulate real-life financial decisions where performance is strongly influenced by emotional factors related to rewards and penalties. Sounds a lot like the financial markets, no?
As a recap, the IGT involves four decks of cards where the subject is asked to choose a card from one of the decks in any sequence. With each turn of a card you either won or lost money of varying values. Sustained playing of certain decks led to large losses but also had large wins while playing other decks would lead to small but consistent gains. Over the years research has shown that most participants do not appear, at least explicitly, to understand the complex contingencies of the game. However, some participants are able to quickly develop “a feeling” about which decks are winners and which decks are losers.
Judgmental processes involved in risk perception and decision making have traditionally been conceptualized as cognitive in nature, being based upon a rational and deliberate evaluation of the alternatives at hand. It wasn’t until the early 1980’s when researchers began to look beyond the rational, deliberate, and cognitive processes of decision making. This new vein of research that was occurring focused instead on the intuitive, as opposed to deliberate, and emotional, as opposed to cognitive aspects of decision making.
Our instincts are keenly alert and risk averse to loss so much so that we are more motivated to take action (pick a card from a certain deck) based on the fear of losing rather than anticipating a gain. Further research using the IGT has shown that we respond to unconscious signals of danger. In fact, the unconscious acts more quickly than the conscious mind. Interestingly enough, much of what Kahneman refers to as system 1 thinking occurs unconsciously.
More recently, the Iowa Gambling Task has been shown to measure an aspect of mental function which belongs in the domain of Executive Function (EF). In other words, the IGT is concerned with decision-making and complex problem solving which occur in the pre-frontal cortex of the brain. I’ll be discussing Executive Function in more detail next month at the Traders Expo in Las Vegas. If you’re able to attend please let me know as I’d like to meet as many readers as possible.