Hardwired for Failure?

HARDWIRED FOR FAILURE IN THE MARKET?

While human brains are constructed to do far more than would appear to be necessary for survival (e.g. we can produce unbelievably complex mathematical formulae that describe physical phenomena) yet our everyday behaviours are still governed by very basic functions that reflect the needs of hunter gatherers. These behaviours are not suited to doing well in trading the markets, we might say that we are 'Hardwired for Failure in the Financial Markets'. Here is a brief description of what we are up against and some ideas to help. It will be good to spend some time thinking carefully about what is outlined here...

HARDWIRED FOR FAILURE IN THE MARKET

  • POOR AT ASSESSING PROBABILTY – BIRDS AND RATS ARE BETTER AT IT – WE LOOK FOR PATTERNS WHERE THERE ARE NONE
  • SIZE OF REWARD MORE IMPORTANT THAN THE PROBABILITY OF IT
  • UNEXPECTED REWARDS PRODUCE MORE DOPAMINE THAN EXPECTED ONES
  • DOPAMINE STOPS WHEN REWARD WITHHELD
  • ANTICIPATION OF REWARD MORE PLEASING THAN RECEIVING IT
  • WE GET THE SAME HIGH FROM FINANCIAL REWARDS AS FROM DRUGS
  • WE ARE QUICK TO SEE PATTERNS AND GET HOOKED ON THESE PATTERNS
  • JUST TWO OCCURRENCES OF THE SAME EVENT LEADS US TO EXPECT IT WILL CONTINUE

DEALING WITH OUR BIASES

  • BE AWARE OF OUR PROPENSITIES TO POOR DECISION MAKING
  • AVOID MAKING DECISIONS WHEN FEELING UNDER STRESS OR DEPRESSED
  • AVOID MAKING DECISIONS WHEN FEELING EXCITED OR INVINCIBLE
  • TAKE A BREAK RATHER THAN ACTING ON IMPULSE
  • CONFER WITH SOMEONE ELSE
  • HAVE RULES TO FOLLOW
  • DON’T DENY EMOTIONS BUT ACKNOWLEDGE THEM
  • DON’T BERATE YOURSELF OVER POOR DECISIONS – OBSERVE THE LIKELY ANGER OR DISAPPOINTMENT, ACCEPT THAT IT IS HAPPENING BUT DON’T RESIST OR EMBRACE IT. WHEN CALMER LOOK BACK ON IT AND SEE IT AS SILLY MAYBE BUT NOT BLAMEWORTHY
  • ACCEPT THAT DECISIONS ARE MADE SUBCONSCIOUSLY AND ARE INFLUENCED BY THINGS NOT UNDER OUR CONTROL