Empathy Is Useless

Empathy is popular but I argue not helpful in financial markets or elsewhere

I have recently seen an interview with a poker champion in which he claims that “empathy” is one of the strengths of his game.  I will suggest this is false for a couple of reasons.  Firstly, we don’t know what it is.  Secondly, what is more likely to be useful is the related but distinct concept of “Theory of Mind.”  I think there are many parallels between poker and financial markets, so my position amounts to an argument that you

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don’t want empathy to make your stock portfolio perform.

There are several things that empathy might be.

  • I feel the same emotion as you
  • I can say what emotion it is that you are feeling
  • I feel a similar emotion to you
  • I feel a weakened form of the emotion that you feel
  • I “sympathise” with your situation
  • I can imagine what I would feel in your situation

This is already complicated enough, without asking difficult philosophical questions like “what does ‘same’ mean here?” or “what is the effect of similar?”  And we haven’t got on to the main point yet.

In poker and in markets, what you want to be able to do is predict and explain the

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behaviour of others.  That is what is known in psychology as a Theory of Mind task.  I have argued in my first book that the way we do this is by simulating others.  We imagine that we are in the situation that the others are in and see how we would feel.  We then predict that they will behave the same way as we would given the resulting emotions.  Note that this does not fit neatly into any of the categories above.

This I think shows the first problem with claiming that empathy is good for performance.  This isn’t a useful piece of advice without defining what empathy actually is.  And secondly, think about what it would do if you felt people’s emotions.  Do you want a surgeon who is about to operate on you to be paralysed with fear because you are?  Do you want a pilot to experience the emotions of passengers as he wrestles with the controls in a storm?

I think that when it comes down to it, what you want is actually a good Theory of Mind.  In fact, as I discuss in my book, there is experimental evidence that better traders have better Theory of Mind.  For that reason, I spend an early chapter explaining how we think Theory of Mind works.  It can be improved I think by taking account of cognitive biases and that will lead to better trading performance.  It will probably improve your poker game too!

What Is “Theory Of Mind?”

The Psychology of Successful Trading: see clip below of me explaining my new book!

#Narcissism and #Unexpected Behaviour

Can Individual Choices Produce Unacceptable Inequality?

Author: 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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