This episode explores the fascinating connection between "trader intuition" and the Theory of Mind (ToM). The discussion draws on research from Caltech, where scientists conducted experiments to understand how uninformed traders can often predict market movements driven by insiders.

● The research, published in The Journal of Finance, involved a series of experiments that simulated markets with and without insiders who had information about future stock prices.

● Researchers found that individuals who were skilled at predicting price changes in markets with insiders also scored highly on tests designed to measure ToM.

● ToM, the ability to understand and predict other people's behavior by attributing mental states like beliefs, desires, and intentions to them, is thought to be a key factor in explaining this intuitive trading ability.

● The study suggests that traders may be unconsciously using ToM to read the intentions of insiders and anticipate their trading actions, even without explicit knowledge of their information.

● Interestingly, the research also found no correlation between trading prediction accuracy and participants' mathematical abilities, suggesting that ToM operates through a different cognitive mechanism.

This episode will unpack the study's findings, examining the role of ToM in financial markets, and discussing the implications for understanding trader intuition. It challenges the traditional view of financial markets as purely rational and highlights the importance of social cognition in investment decision-making.

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