02 Jun Your Inner Monkey
There is an outbreak of Asian Flu at your location. If nothing is done, they predict that 600 people will die. Two courses of action have been suggested. If program A is adopted, 200 people will be saved. If program B is adopted, there is a one-third probability that 600 people will be saved and a two-thirds probability that no people will be saved.
Which of the two programs do you favor?
Result (302 vote sample):
Does this surprise you? It should because, on average, Program A and Program B are identical. But Program A seems to imply a bigger loss when actually Program B is more risky.
If we restate the question this way, "Two courses of action have been suggested. If program A is adopted, 400 will die. If program B is adopted, there is a one-third probability that nobody will die and a two-thirds probability that 600 people will die. Which of the two programs do you favor?" The expected response will be overwhelmingly for Program B even though, again, the outcome is the same.
Why does this happen? Because the second question is very clear about how much loss there will be and so they will take a greater chance for the probability that more lives will be saved, so we, humans, will take extra risk to save lives (or avert losses).
Interesting; don’t you think?
How did it feel the last time you covered a short at the top? How about taking a small loss right before the market violently moved in your direction? Consider that even though you got upset, you would be happy to do that again than to experience staying in the planned position longer and have it go violently against you even if that can only happen 10% of the time. Trust me, it sounds like 10% would make it a no-brainer, but you will find an excuse to close the position for a small loss.
Is it any wonder that most traders hang on to losing trades a long time and let go of winning trades quickly? Why do you suppose that is? Yep…it is that crazy monkey within us.
Many will respond by trying to desensitize themselves to emotions while trading. Don’t try to be unemotional, this is useless. In essence, trying to maintain an unemotional disposition while trading makes as much sense as maintaining slow breathing while running up 20 flights of stairs. It won’t last very long before something is going to give and the outcome may be a concussion from passing out.
What can you do about it? It is like beating nervousness on speech day at school or performance anxiety on a stage. The best approach is to be well prepared coupled with your ability to bring awareness to your thoughts and emotions while trading. The second thing that must be addressed is to set a predefined and comfortable risk parameter and to accept it. This will more probably lead to your logical mind remaining objective while the market bounces around your entry before the move actually happens.
I will address this topic in a webinar at a later date. I hope you found this interesting. Good luck.