Food for Thought

[The_Merchant]

So as an amateur psychologist who is friends with several professional psychologists, something occurred to me recently.
In psychology there are people with depression. And psychological help can help those people with cognitive therapy. There are people with PTSD and psychological help can help them as well. Lots of people have lots of disorders and psychology can have at least SOME impact on their recovery.

Then you have trading. You start with people who, prior to their first trade, were not diagnosed with ANY psychological disorders, yet, nearly across the board, cannot follow a simple plug 'n' chug method without taking trades that are "outside of the system."

After years of trading - and after talking with those who have been trading far longer than I have - it occurred to me to ask this question.

"What is the basis for believing our failures in trading are due to psychology?"

Is it possible that the consistent inability to follow a system among amateur traders and the emotions that we feel that lead to bad decisions are caused by something besides psychology?

I mean if it was psychological you'd think there would be something we could change besides "use more self discipline" that would make trading successfully a more natural occurrence. But I have yet to learn of a single instance among thousands of traders who can claim that trading was once counter-intuitive, but they underwent some psychological therapy and now it's the most natural thing in the world.

Anyone else get what I'm saying?

 

[nonlinear5]

Anyone else get what I'm saying?

I think what you are asking is this: "If the failures of most traders are attributed to some psychological disorders, how come the psychologists can't easily "fix" these disorders, and set the traders straight on the path of consistency and profitability"?

 

[globalarbtrader]

So as an amateur psychologist who is friends with several professional psychologists, something occurred to me recently.
In psychology there are people with depression. And psychological help can help those people with cognitive therapy. There are people with PTSD and psychological help can help them as well. Lots of people have lots of disorders and psychology can have at least SOME impact on their recovery.

Then you have trading. You start with people who, prior to their first trade, were not diagnosed with ANY psychological disorders, yet, nearly across the board, cannot follow a simple plug 'n' chug method without taking trades that are "outside of the system."

After years of trading - and after talking with those who have been trading far longer than I have - it occurred to me to ask this question.

"What is the basis for believing our failures in trading are due to psychology?"

Is it possible that the consistent inability to follow a system among amateur traders and the emotions that we feel that lead to bad decisions are caused by something besides psychology?

I mean if it was psychological you'd think there would be something we could change besides "use more self discipline" that would make trading successfully a more natural occurrence. But I have yet to learn of a single instance among thousands of traders who can claim that trading was once counter-intuitive, but they underwent some psychological therapy and now it's the most natural thing in the world.

Anyone else get what I'm saying?

I'm no psychologist but I have read most of the behavioural finance / relevant psychological literature. My understanding is that most people are bad at trading because of cognitive biases that all humans have, to some degree or another: over confidence, loss aversion, narrative fallacy and so on.

To put it another way "normal" people are likely to be bad at trading (which is why I let a computer do mine for me). Perhaps there are some people who are worse at trading than average, eg if you're depressed that probably can't help. More likely is that some people with certain types of psychological problems are likely to be better at trading (sociopaths / autisitic spectrum for example... I'm speculating).

The point is you wouldn't be able to fix cognitive biases with psychological treatments designed for healing people with mental illness. I suspect this is a labelling issue more than anything. We talk casually about "bad trading psychology", but what we really mean is cognitive biases, which aren't the same thing as a psychological condition like depression.

GAT

 

[O(1)]

most times the real problem is beyond psychological. even if the average trader could follow their rules, they don't have a strategy that will likely extract alpha. but, that's a harsh reality. and, if someone believed that to be true then it could crush their ego and thus it's easier to seek other false realities or other things to blame.. psychology included

 

[The_Merchant]

I'm no psychologist but I have read most of the behavioural finance / relevant psychological literature. My understanding is that most people are bad at trading because of cognitive biases...

Cognitive biases. Yes, I think that's what I'm driving at. It would make sense to me that cognitive biases are NOT the cause of bad trading directly, but are instead the cause of picking the wrong direction or of believing in the wrong market conditions (which, in turn, leads to fear/overconfidence, then causes bad trading).

So that begs the question...What causes cognitive bias? What is triggering this mechanism that "all humans have?" Has anyone asked that question yet? Or found an answer?

 

[globalarbtrader]

Cognitive biases. Yes, I think that's what I'm driving at. It would make sense to me that cognitive biases are NOT the cause of bad trading directly, but are instead the cause of picking the wrong direction or of believing in the wrong market conditions (which, in turn, leads to fear/overconfidence, then causes bad trading).

So that begs the question...What causes cognitive bias? What is triggering this mechanism that "all humans have?" Has anyone asked that question yet? Or found an answer?

Behaviour that made sense a million years ago no longer does. System 1 - fast instinctive response -made sense when we were trying to survive on the savannah. If we'd sat around thinking and being rational (system 2) we'd have got eaten by sabre toothed tigers.

GAT

 

[Xela]

Anyone else get what I'm saying?

Yes - I don't know the answer to it, at all, but I think I get it.

You start with people who, prior to their first trade, were not diagnosed with ANY psychological disorders, yet, nearly across the board, cannot follow a simple plug 'n' chug method without taking trades that are "outside of the system."

Yes - I wonder, as a sort-of-statistician, whether (m)any of them are also people whose behaviour in other areas of their lives actually "matches" that phenomenon, perhaps without it having been noticed in such an obvious way simply because of the differing contexts?

I'm only throwing out a quick observation, here: it may be entirely wrong. I have absolutely no claim to expertise in this field, or even really to any experience of it (having Asperger's syndrome, myself, and being comparatively short of "psychological insights" about others' behaviour. My own perspective, if that's relevant, is that I've always instinctively felt that the "psychological factors" in trading are widely overstated in general, and specifically that the realities of the market predicate that it's far easier for people to write, publish and sell "psychology books" than "trading books". And that the commonest reasons for aspiring trader failure are all about "not having an edge" rather than being "psychological". Just my perspective.)

 

[globalarbtrader]

Yes - I don't know the answer to it, at all, but I think I get it.





Yes - I wonder, as a sort-of-statistician, whether (m)any of them are also people whose behaviour in other areas of their lives actually "matches" that phenomenon, perhaps without it having been noticed in such an obvious way simply because of the differing contexts?

I'm only throwing out a quick observation, here: it may be entirely wrong. I have absolutely no claim to expertise in this field, or even really to any experience of it (having Asperger's syndrome, myself, and being comparatively short of "psychological insights" about others' behaviour. My own perspective, if that's relevant, is that I've always instinctively felt that the "psychological factors" in trading are widely overstated in general, and specifically that the realities of the market predicate that it's far easier for people to write, publish and sell "psychology books" than "trading books". And that the commonest reasons for aspiring trader failure are all about "not having an edge" rather than being "psychological". Just my perspective.)

Personally I disagree. I think most traders fail because they (a) trade too much, (b) take on too much risk and (c) don't stick to their system. All of these failings can be put down to overconfidence - a cognitive bias. Simple trading systems with zero edge are profitable; but people can't follow these rules. That's a psychological deficiency, if we can use that word in relation to cognitive biases. And as I speculated earlier someone with Aspergers might actually be at an advantage here.

GAT

 

[Xela]

Personally I disagree. I think most traders fail because they (a) trade too much, (b) take on too much risk and (c) don't stick to their system.

I know from earlier conversations, here and mostly elsewhere, that far more people agree with you than with me, certainly.

I recognise all the points above, too, (and have indeed mentioned them, well - kind of, in my little list of my perception of the five main reasons for aspiring trader failure), but I strongly suspect that "not having an edge" outweighs them. I can't prove it, of course.

All of these failings can be put down to overconfidence - a cognitive bias. Simple trading systems with zero edge are profitable; but people can't follow these rules. That's a psychological deficiency, if we can use that word in relation to cognitive biases.

I hear you.

And as I speculated earlier someone with Aspergers might actually be at an advantage here.

This I don't doubt.

 

[lawrence-lugar]

So as an amateur psychologist

Anyone else get what I'm saying?

People fail because they are simply bad traders. it's as simple as that--there is no deep magical mystery behind it

Not everyone is cut out for it; that's like asking a casual crop pilot...to fly a fighter jet in an actual war.

Most people should just invest.
Just let your money sit in a broad-based ETF like the SPY -- considering 95% of traders fail...this is good advice.
It's better to make peanut profits, then to lose nearly your entire account trying to capture the big score.

Everyone thinks they can sing so good...that they will win American Idol; Same thing with trading/traders.