How many traders realize that the better models of decision making rely on a foundation of subjectivity? In other words, don't most of us on or around Wall St. think that we are supposed to be trading via a maximum value, maximum utility or "rational man" model? I mean that surely is what I thought when I heard trading teachers talk. Now maybe this is because I came to trading from The University of Chicago but I don't think so - I didn't take that many courses in the business school.

As it turns out, people who spend all of their time thinking about the right model of human decision making think in terms of subjective or even personal probabilites. This means that you make a judgment including the context of what it means to you.

So for example, you might choose to skip a trade because even though it fits your scenarios you know you aren’t in a position – for whatever reason – to manage it. In this case you know the subjective or personal probabilites of it working out are slim – regardless of the market itself. This is the real world.

Now we even have to go one step further and add regret into these subjective probabilities – will I feel regretful or joyful if I do or don’t take this option? Why? Aren’t we supposed to be over regret?

Some research shows regret to be the most powerful motivator. I know it certainly is the one I hear on the phone.

Adding subjectivity – how much you believe in something or the personal context you are in (won’t be here to manage the trade maybe) and then adding regret or potential regret AND MAKING IT EXPLICIT and known… will help you make better decisions under uncertainty.

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