The idea of human risk offers a different angle on the idea of psychological capital. It is easy to think about markets and pricing as abstract entities when in reality they are the sum total of human decisions. Hence, human decisions are at the core of all bubbles, crashes, rallies, sell-offs and market volatility – regardless of what time-frame you are looking at.
But does the world really have a good understanding of how humans react and make decisions?
It gets complicated but the biggest news is that emotions are actually germane to decisions. In fact, without them, traders can neither decide nor act. Lots of scientific evidence supports that idea yet books, trading coaches, CNBC reporters and most people still talk in term of being unemotional. Not to use an over-used analogy but essentially that perspective on human risk is akin to still believing the world is flat.
Reducing human risk requires a whole new understanding and strategy for dealing with the reality of emotions and their role in decision-making. Step one is to change your opinion about emotions from one of they are a liability to one of they are both information and motivation – in that order!