What Day Tarders Can Learn from Fighter Pilots About Making Fast and Accurate Decisions

[Abiel 475]

I was browsing Farnam Street when this article caught my attention: What You Can Learn from Fighter Pilots About Making Fast and Accurate Decisions about the OODA loop, a practical concept designed to be the foundation of rational thinking in confusing or chaotic situations, developed by strategist and U.S. Air Force Colonel John Boyd for fighter pilots. 

OODA stands for Observe, Orient, Decide, Act. Boyd intended the four steps to be repeated again and again until a conflict finishes:

1: Observe
The first step in the OODA Loop is to observe. At this stage, the main focus is to build a comprehensive picture of the situation with as much accuracy as possible.

A fighter pilot needs to consider: What is immediately affecting me? What is affecting my opponent? What could affect us later on? Can I make any predictions, and how accurate were my prior ones? A pilot’s environment changes rapidly, so these observations need to be broad and fluid.

And information alone is not enough. The observation stage requires awareness of the overarching meaning of the information. It also necessitates separating the information which is relevant for a particular decision from that which is not. You have to add context to the variables.

The observation stage is vital in decision-making processes.

2: Orient

Orientation, the second stage of the OODA loop, is frequently misunderstood or skipped because it is less intuitive than the other stages. Boyd referred to it as the schwerpunkt, a German term which loosely translates to “the main emphasis.” In this context, to orient is to recognize the barriers that might interfere with the other parts of the process.

Without an awareness of these barriers, the subsequent decision cannot be a fully rational one. Orienting is all about connecting with reality, not with a false version of events filtered through the lens of cognitive biases and shortcuts.

Including this step, rather than jumping straight to making a decision, gives us an edge over the competition. Even if we are at a disadvantage to begin with, having fewer resources or less information, Boyd maintained that the Orient step ensures that we can outsmart an opponent.

3. Decide

Having gathered information and oriented ourselves, we have to make an informed decision. The previous two steps should have generated a plethora of ideas, so this is the point where we choose the most relevant option.

Boyd cautioned against first-conclusion bias, explaining that we cannot keep making the same decision again and again. This part of the loop needs to be flexible and open to Bayesian updating. In some of his notes, Boyd described this step as the hypothesis stage. The implication is that we should test the decisions we make at this point in the loop, spotting their flaws and including any issues in future observation stages.

4. Act

While technically a decision-making process, the OODA loop is all about action. The ability to act upon rational decisions is a serious advantage.

The other steps are mere precursors. A decision made, now is the time to act upon it. Also known as the test stage, this is when we experiment to see how good our decision was. Did we observe the right information? Did we use the best possible mental models? Did we get swayed by biases and other barriers? Can we disprove the prior hypothesis? Whatever the outcome, we then cycle back to the first part of the loop and begin observing again.

Boyd developed this strategy for fighter pilots. However, like all good mental models, it can be extended into other fields. So I googled OODA and Day Trading and our good buddy Brett N. Steenbarger, author of The Daily Trading Coach, came up. 

Right in his website there is this 11 page article "Trading as Mental Warfare" (a new window will open to download a .doc file). In this article, Steenbarger explains how trading, like the battlefield, offers an environment typified by risk, danger, and uncertainty, rewarding the  efficiency of mental processing.  The successful trader is one who can rapidly observe market conditions, orient himself, integrate information into effective decisions, and quickly act upon those decisions.  

So, lets watch Top Gun again! 

 

[PeterD 49]

Great articles and I love the thought process. The key in this is not only to understand the principals of OODA but to practice them to be able to apply them rapidly and without hesitation in high-pressure situations (eg. active trading). Seems to me we can play with this during the slower times of the day (late mornings and afternoons) and as we get better and faster, move them forward to the early morning and the open.

[Abiel 475]

On 8/25/2018 at 1:55 PM, Abiel said:

2: Orient

Orientation, the second stage of the OODA loop, is frequently misunderstood or skipped because it is less intuitive than the other stages. Boyd referred to it as the schwerpunkt, a German term which loosely translates to “the main emphasis.” In this context, to orient is to recognize the barriers that might interfere with the other parts of the process.

Without an awareness of these barriers, the subsequent decision cannot be a fully rational one. Orienting is all about connecting with reality, not with a false version of events filtered through the lens of cognitive biases and shortcuts.

Including this step, rather than jumping straight to making a decision, gives us an edge over the competition. Even if we are at a disadvantage to begin with, having fewer resources or less information, Boyd maintained that the Orient step ensures that we can outsmart an opponent.

"to orient is to recognize the barriers that might interfere with the other parts of the process" = find reasons to not take this trade? What do you think? 

[Jason Antinori 2]

Anyone interested in the OODA loop needs to read or listen to the John Boyd biography. It is an amazing story about a fascinating and complex man

 

[Rob C 826]

6 hours ago, Jason Antinori said:

Anyone interested in the OODA loop needs to read or listen to the John Boyd biography. It is an amazing story about a fascinating and complex man

 

Yep, I totally recommend the book as well.