During my Training Session I was having a discussion with one of my Students on his trade he has been doing over last 6 months and try to find the reason for his Losses.
One Thing which strikes me was for all profitable trade he said
- I was Disciplined
- I had an excellent strategy
- My Risk and Money Management was Excellent
When we started discussing on Losses he started giving excuses like
- Operator Hit my Stoploss
- Market came down based on some news
- Markets are manipulated by Fund Houses etc..
So Profit are due to his skill set and losses are due to some excuses
This is the reason why he was not successful till now
As human beings, we like to see ourselves in a favorable light.
This is such a strong trait that it can be hard to be truthful and objective about ourselves and our performance. Assessing ourselves in an impartial way that uncovers our limitations and performance flaws does not come naturally. For many of us, our ego would prefer to neglect our shortcomings.
Our ego doesn’t like to be challenged and uncovering our limitations and performance flaws challenges and threatens our egos.
Study conducted by psychologists Liqing Zhang and Roy Baumeister give us more perspective on Ego and trading
In one of the study participants were advised that “if you are the
kind of person who chokes under pressure or don’t think you have what it takes to win the money, then you might want to play it safe. But it’s up to you.”
In other studies, some of the participants were given a very difficult creativity test on which it was impossible to score well, and then given feedback on their poor performance. The feedback set them up psychologically as a mild threat to their ego.
All participants then engaged in various activities where the influence of a threatened ego on their comportment could be assessed. These activities included investing, puzzle completion, and auction bidding
Zhang and Baumeister found that when people’s egos were threatened, they became consistently entangled in losing endeavors.
- When people felt their self‐image was in jeopardy, their decision making took a distinct turn for the worse and their performance as well as their outcomes suffered.
- When the researchers suggested to some persons that they might choke under pressure, those participants invested and lost greater amounts of money compared to participants who were not told they
- Those who were given negative feedback on a creativity test subsequently spent and lost more money in an auction, bidding significantly more than the actual value of items, indicating that an irrelevant ego threat (results on a creativity test have nothing to do with skillful bidding in an auction) engages the ego in an all out effort to win as a way to soothe a wounded self‐image, despite negative
- Those in the study who did not have their ego mildly challenged showed the opposite. They performed well.
The egoistic drive to protect our favorable view of ourselves can be so great that we can go well beyond avoiding a hard look at the poor decisions that we made.
There is substantial research showing that people whose decisions turn sour tend to commit more resources to the failing endeavor.
This is known as escalation of a losing commitment .
“Throwing good money after bad” can be seen in the trader who takes a
long position in a market, sees the market go against her trade, and begins to “average down” the trade’s basis by adding additional capital at lower prices. Each additional commitment extends the risk. The decision to add to the losing trade is made not because the trade is a good one—it’s a Loss making.