the psychology of successful trading

Simulation Theory


Theory of Mind (ToM) is the label for the abilities we have to predict and explain the behaviour of others, by ascribing mental states such as belief and desire to them, or otherwise. There are two major competing theories of ToM: the Theory Theory (TT) and Simulation Theory (ST). TT holds that we understand others by having a theory of them or their behaviour. ST holds that we understand others by putting ourselves in their place. There are also different types of ST. ST(Transformation) holds that I simulate you by becoming you. ST(Replication) holds that I simulate you by becoming like you. Below I briefly address three objections to ST.

ST(Transformation) is Incomprehensible

ST(Transformation) has been questioned. Stich and Nichols provide three possible interpretations of what Gordon’s position might mean, all of which they find unsatisfactory. They note that Gordon has characterised ST(Transformation) as meaning that “we explain and predict behaviour by “imaginative identification” — “that is, [we] use our imagination to identify with others” (Stich and Nichols [p. 91]{Davies95}) in order to fulfil that aim.

“Imaginative Identification”

They quickly dismiss the first interpretation of this. That was the idea that we experience conscious imagery when we simulate on the grounds of phenomenological implausibility. The second interpretation involves consideration of the explanation. Is the intention to cover all or merely some cases of application of ToM?Stich and Nichols think that if the change is made to `some’ then ST becomes “patently true [but] not very exciting, and […] not incompatible with TT”. (Stich and Nichols [p. 92]{Davies95}).

However, since it seems that there are ambiguous cases of use of both TT and ST, the serious defence of either should lie in the claim that one of the theories explains many important cases of application of ToM and not all. So Gordon’s line should escape Stich and Nichols particular charge here.

Stich and Nichols conclude though that Transformation ST involves “imaginative identification with the other” and that this is a label for “a special sort of mental act or process which […] need not be accompanied by conscious imagery” (Stich and Nichols [p. 92]{Davies95}). Stich and Nichols then ask what this means, bringing the charge that they find it incomprehensible.

“If I Were You” In Simulation Theory

There arise here immediate questions which are familiar. We might ask what people mean when they employ the popular locution `If I were you…’ when giving advice. The conundrum is that the person giving advice presumably means “if I were in your position with my outlook and abilities, I would do X.” However, those abilities and that outlook might preclude being in the situation being advised upon.

It does not seem plausible that the locution means “If I were you in your position with your abilities and outlook I would do X.” That is because a). presumably the person receiving the advice already has access to that type of suggestion and b). the advisor will not, necessarily. Daniel phrases this objection neatly when he asks “how much of myself am I to project into the other persons’s shoes” (Daniel [p. 39]{Daniel93}). The answer, of course, is `the right amount’.

What Makes Simulation Hard?

I will use the term S to refer to the subject doing the simulating. O is the target of simulation. S wishes to understand or predict the behaviour of O. In Simulation Theory, S does this by simulating O.

S will not be successful in simulating O if S ascribes to O abilities and experiences that are remote from those of O. That’s true irrespective of whether that profile of abilities and experiences match those of S more closely. Naturally this presents some difficulties for simulation. S’s will find it difficult to simulate O’s who are dramatically more or less intelligent than themselves.

Simulating People Much Smarter Or Dumber Than Ourselves Is Hard

Stich and Nichols may legitimately ask which line Simulation Theory takes on the conundrum. Re-examining the argument above produces the opposite conclusion. S does not want to use S’s own abilities and outlook to predict what O will do. To the extent O has different abilities and outlooks, S’s prediction will be wrong.

A chess grandmaster does not expect a novice player to use the same defence that he saw used against a particular attack in his last world championship appearance. The grandmaster may indeed struggle to reduce his abilities to the correct level. As a practical matter, this will not be a problem. The grandmaster will simply use his vastly superior playing skills to compensate for his lack of ability to predict what strange tactics the novice will employ. He will still exploit weaknesses easily.

In the other direction, the novice player would do well to predict a grandmaster-level defence against his attack. However, this information will not be available. So it seems as though there are difficulties in becoming the O when the O has significantly different levels of relevant ability.

These difficulties seem less marked when considering information asymmetry. This is because information asymmetries are ubiquitous in everyday life. They occur both between S and O and between the same S at different times. Step changes in ability in a single S are either much less frequent or indeed never seen; outside of perhaps some unusual pathologies.

Only Grandmasters Can Simulate Grandmasters

This challenge seems equally strong on both the replication and the transformation views. If S lacks the ability to become a chess grandmaster, then S also lacks the ability to become like one, in terms of ability at least. S has however no difficulty simulating information asymmetries between S and anyone else. That’s true since this is generally not related to ability differences.

Photo by Gladson Xavier on

However, we need to remember what the challenge is, exactly. It seems to be demanding to know what is meant by becoming someone else. I have sketched out above what this might mean. Then Stich and Nichols can say that on the above outline, it looks as though Simulation Theory provides a picture on which ToM will fail to produce accurate predictions. That will happen when S lacks some of the relevant abilities or disabilities of O. S will perhaps be more successful when the differences between S and O are those of information asymmetry. Fine: there are systematic errors in ToM. These will need explaining; I will do this in later work.

Simulation Theory(Replication) Involves Impossible Ascriptions

One logical objection brought against Goldman by Olson and Astington is fairly easy for Goldman to deal with. The objection is to charge that Goldman

“argues that the ascription of beliefs to others is done by simulating the other’s state on the basis of one’s own. But […] the only definitive evidence for ascribing belief occurs in the case of ascribing false belief. Yet one’s own beliefs are never introspectively available as false beliefs, so how could false beliefs ever be ascribed to others? That is, how could one see in another what was never experienced in one’s self?”

(Olson and Astington [p. 65]{Olson93}).

No One Experiences False Belief

What do Olson and Astington mean by the surprising claim that no one ever experiences their own false belief? They mean that very quickly on discovering conclusive evidence for the falsity of a belief, we will change that belief such that it is no longer false. Or more precisely, we will eliminate the previous belief since it has been falsified. We will replace it with its negation that is a new true belief. So it is true that we never have current experience of a belief that is false now. That of course, is not what Simulation Theory needs.

The above line does not address some situations of cognitive bias. For example, some people continue to believe for example that Brexit is a good idea. That is despite overwhelming evidence to the contrary. That is lack of adequate processing of evidence. The Brexit voters continue to have the false belief that Brexit is a good idea.

It is only true that we have no experience of our own false beliefs if it is true that we have no experience of our beliefs changing. This is because both of those scenarios require only that we have an ability to use memory with some non-zero accuracy to compare our current belief states with our previous ones. We can see then that Introspectionist ST(Replication) needs such a memory capacity. It is though not committed to the claim that it must always function correctly.

Simulation Theory Cannot Account for Some Developmental Data

Stich and Nichols claim some developmental data can be explained by TT but not Simulation Theory. In developing a response to this objection, we may also learn more about the differences between TT and ST. The data in question derive from a variant of the false belief tests. The experimenters ask children about the beliefs of another child sitting in front of them about the contents of a box. The box is closed. The other child may have either looked in the box or been told what is in it.

The first child will be good at answering correctly that the other child knows what is in the box when the other child has looked in the box. But younger children are bad at answering correctly when the other has child knows what is in the box. Older children — five and up — are good at both tasks. They know that if you see what is in the box, you know what is in the box, but they also know that you know if you are told what is in the box.

Folk Psychology And Simulation Theory

Stich and Nichols claim that these data are consistent with TT but not with ST. They write that “as children get older, they master more and more of the principles of folk psychology” (Stich and Nichols [p. 262]{Stich93}). However, they say, while it is clear that even the younger children “form beliefs as the result of perception, verbally provided information, and inference” (Stich and Nichols [p. 262]{Stich93}) they do not have the latter two routes to assessing the beliefs of others.

Thus they are not using their own minds to simulate others, thus ST is false, according to Stich and Nichols. Of course, Stich and Nichols can’t have this conclusion. They can claim that these data show that younger children are unable to use all of the capacities available to them to form their own beliefs when simulating others. Their ToM is to that extent immature. Since Stich and Nichols allow that three-year olds have immature ToM, these data do not weigh one way or the other in the TT vs ST debate.

Maturation And Simulation Theory

We might on this picture suppose that the way ST abilities develop as the child matures is that more of the routes to knowledge that the child uses become available for the simulation as maturation proceeds. Perhaps exactly that just is the development in question.

There is a particular time course of development of these capabilities in the case of the child’s own beliefs. There is no reason to presume that the arrival of abilities to form knowledge from perception, testimony and inference are all simultaneous. So one would expect the same as the child’s abilities to simulate develop. This is exactly what we find. Empirical studies confirm that different ToM component abilities develop at different times.

As Farrant et al confirm, “[c]hildren typically pass the diverse desires task first, followed by the diverse beliefs, knowledge access, contents false belief, and real–apparent emotion tasks in that order” (Farrant et al [p. 1845]{Farrant06}). ST isn’t committed to anything by these data. But if it assumes that maturation means the child can bring more of its own abilities to bear when simulating others, ST will to that extent find empirical support.

See Also:

#Proust: An Argument For #SimulationTheory

What Is “Theory Of Mind?”

By Tim Short

I am a former investment banking and securitisation specialist, having spent nearly a decade on the trading floor of several international investment banks. Throughout my career, I worked closely with syndicate/traders in order to establish the types of paper which would trade well and gained significant and broad experience in financial markets.
Many people have trading experience similar to the above. What marks me out is what I did next. I decided to pursue my interest in philosophy at Doctoral level, specialising in the psychology of how we predict and explain the behaviour of others, and in particular, the errors or biases we are prone to in that process. I have used my experience to write The Psychology of Successful Trading. In this book, I combine the above experience and knowledge to show how biases can lead to inaccurate predictions of the behaviour of other market participants, and how remedying those biases can lead to better predictions and major profits. Learn more on the About Me page.

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