Enemy Number One – Yourself

Have you ever tried to give up smoking? It’s easy, right? You just stop putting cigarettes in your mouth. Same goes for losing weight. You eat less junk food and exercise more. Nothing could be simpler.

Yeah, right. If only that were the case. The truth is, knowing what to do and actually doing it are not the same thing. Self control is hard.

Last week I talked about why that is. Evolution has programmed much of our behaviour. It has physically shaped the neural pathways in our brains so that we find certain actions easier than others. Going against this programming is really difficult. Taking a loss, for example, is a hard thing to do. For our ancestors, losing out in the hunt might mean not eating, which could ultimately mean starving to death. Is it any wonder that when we’re caught in a losing trade and we try and exit, a little voice in our head says, “Hang on just a little bit longer, it might come good!” Evolution doesn’t want us to lose.

As I’ve mentioned on more than one occasion, I’m pretty lazy. If there’s a shortcut, I’ll take it. Which is why, when faced with the dilemma of how to overcome the mental hurdles involved in trading profitably, I looked for an easier solution than ‘toughen up’. Like I said, self-control is hard. Little did I know when I started that search more than a decade ago, it would lead me to years of research into human cognition. So much for taking the easy option!

One of the first things I realised when I delved into the inner workings of the mind was that my initial hunch was right. Trying to overcome hundreds of thousands of years of evolution is a losing battle. It’s not even worth trying. It’s safe to assume that for the next few thousand generations at least, taking a loss, or accepting risk, is going to be hard.

The next thing I discovered was that taking a loss is the least of our problems. Evolution has made our trading lives far tougher than I had ever imagined. In fact, buried within our brains is a ton of programming which, while very efficient at keeping us alive, is actively working against us when we trade. Our heads are filled with cognitive biases and heuristics that actually alter our perception of the market.

I’m not kidding. Take one chart and show it to two traders, and they will see different signals on that chart, depending on their current position. Their brains will filter what their eyes see and present it accordingly. We quite literally cannot trust our own eyes!

Sounds bad, doesn’t it? Guess what? It’s worse than that. On top of these cognitive biases, we have a whole bunch of learned behaviours that are messing with our minds. It’s not just evolution we’re battling, it’s everything we’ve ever learnt, every experience we’ve had since the day we were born. They have all shaped the way we think and the way we perceive the world around us…including the markets.

In a strange way, the more I researched how our brains make trading more difficult than it should be, the more comforted I was. That didn’t change the underlying problem though. So my research progressed, and I began to turn problems into solutions.

Today’s post has turned out even longer than last week’s, so I’m going to break here and will write more tomorrow.

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