I Knew It! Yesterday, I unwound the JPY1 trade. It hadn’t hit any reassessment triggers and everything was going according to plan. Vols, skew and spot were all moving in the right direction and all for the reasons I had laid out in the trade write-up. Clients sent emails congratulating and thanking me for the idea.
In the minutes that followed the unwind and hitting send on the email, spot ticked higher, leading one subscriber to remark on my “uncanny timing”. I, however, wasn’t so sure and it showed in my response. “Only time will tell.” I’ll admit, it was a relief to see it go higher, for I had gone against my plan, and taken profit early. I wanted to be vindicated for that decision. I wanted to be right.
Between coaching sessions, my eyes would glance over at the Bloomberg monitors. As the close approached, spot began the next leg of its descent and hasn’t looked back since. Regret kicks in. “I knew it!”, shouts my inner voice. Not only has spot continued to move toward my initial target, but so too have implied vols and skew. As of this moment, rather than being up 145 bps on the trade, I’d be showing a 228 bps profit and every reason for entering the trade remains intact. “I knew it!” Truth is, I didn’t know it. If I did, I’d still be in the trade. That’s the cold hard truth. Yes, I believed the odds were in favor of doing this trade when I initiated it. At that moment, particularly when I doubled up after the BoJ policy decision, I received plenty of push back. It was a clear case of WYSIATI (What You See Is All There Is), which at that time was negative rates for Japan.
Well, it’s a similar phenomenon that occurs now, only in this case it’s called hindsight bias. It’s difficult to see how the last 24 hours could have played out any other way, especially given my original write-up. It’s all right there. Clearly, I knew this would happen. However, what’s also there is my post-mortem, the explanation for why I unwound it yesterday. Simply by writing that post-mortem, I have helped myself overcome the regret I would likely feel in this moment. Thanks to an understanding of how our brains work, I really did know that if things played out as they have, that I would be experiencing regret in this moment. That post-mortem was really a note to Steve of the future, letting him know that he didn’t know this would happen. The reason that’s so important is that it allows me to move on. It reminds me that this is but one trade of many that are available. Yes, I have missed out on 83 bps and maybe far more on this trade before all is said and done, but the truth of the matter is this. It isn’t the only one out there. Literally billions of opportunities exist to make the next 83 basis points. I can either expend the limited mental effort I have available to me laser focused on the one that got away, or I can search for more bait, put it on my line and drop it back in the water.
Want to know how money is made and lost in this business? It’s right here, in these moments. You either prepare for them ahead of time, or suffer their consequences.
About the Author For nearly thirty years, Stephen Duneier has applied cognitive science to institutional investment management. The result has been career best returns for experienced portfolio managers who have adopted his methods, the turnaround of numerous global trading businesses, the development of an award-winning $1.25 billion dollar hedge fund and 20.3% average annualized returns as a global macro portfolio manager.
As a speaker, Stephen has delivered informative and inspirational talks to audiences around the world for more than 20 years on topics including global macro economic themes, how cognitive science can improve performance and the keys to living a more deliberate life. Each is delivered via highly entertaining stories that inevitably lead to further conversation, and ultimately, better results.
Stephen Duneier was formerly Global Head of Currency Option Trading at Bank of America and Managing Director of Emerging Markets at AIG International. His artwork has been featured in international publications and on television programs around the world, and is represented by the world renowned gallery, Sullivan Goss. He received his master's degree in finance and economics from New York University's Stern School of Business.
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