Investing and "The Hard Work Of Combinatorial Play"

From Forbes:

Not so long ago, received wisdom in the psychology of trading and investing in financial markets said that the key to success was consistency. Once you found your probabilistic “edge” in markets, you needed only to follow the process that implemented that edge to stay profitable for all time. “Stick with your process” and “Trade with discipline” became the mantras of traders and trading coaches alike.

Today, such advice seems quaint, an artifact of a bygone era. Markets, we now recognize, are ever-changing; the factors that account for financial returns—from value to carry to momentum—wax and wane with shifts in world events, monetary policy, and macroeconomic developments. In the late 1990s, those trading momentum in the stock market amidst internet-fueled enthusiasm could do no wrong. Trading those same patterns in the low volatility markets created by zero-interest rate policies has been a path to the poorhouse. Discipline is necessary, but not sufficient in generating trading and investment profits. Equally important is adaptability and the ability to generate fresh sources of edge as markets evolve.

What that means in practical terms is that long-term success in financial markets requires creativity, the ability to perceive and act upon new sources of opportunity. In that sense, the trader is not so different from the entrepreneur. Just as consumer tastes and appetites for spending change over time and require continual tweaking of the business, the financial marketplace undergoes structural shifts that necessitate adaptation.  In the wake of the recent election, for example, we’ve seen dramatic shifts in the correlations among assets and their directional movement. Blindly sticking with what has worked in the past ensures suboptimal outcomes in an altered future.

So how can we become more creative, more able to capitalize upon changing opportunity sets? Interestingly, research suggests that the key lies, not just in working harder, but in playing better.

Combinatorial Play
An insightful post from Maria Popova supports Einstein’s notion of creativity as combinatorial play. Once we experience many facets of a given field, we become able to play with those facets, arranging and rearranging them to perceive and grasp new patterns. An important implication is that we cannot be creative in a domain unless we achieve a level of domain expertise. I can generate creative psychological interventions because I have over 30 years of experience as a psychologist to draw upon. If asked to design a creative ice skating routine, I would be entirely clueless. We cannot find fresh combinations unless we have ample raw material to combine!...MORE