Trading Emotions – the Latest Research

psychology of riskThe latest research on preventing the behavioral risks of emotion overload once again turns out to be counter-intuitive. Instead of using your logic to change your feelings, it appears that embracing your emotions may be the fastest route to calming or changing them. “Tapping into more [emphasis mine] emotions improves coping, according to Todd Kashdan, Past Association for Psychological Science Board Member Lisa Feldman Barrett, and Patrick McKnight (2015)

The steps to consider learning are:

  1. Emotion concepts – how do you describe the experience of frustration, doubt, fear or even being pleased?
  2. Emotion language – how many emotion words can you list?
  3. Emotion differentiation – when a trade goes wrong, can you itemize at least two feelings the experience gives you?

In the original authors’ words: “Training on emotion differentiation also improves a person’s ability to resist the biasing effects of emotion on judgments.”

Putting it simply, what common feelings occur in the midst of a losing trade? Can you feel and articulate any or all of the following?

  • disappointment
  • frustration
  • embarrassment
  • fear
  • ?

Try turning your attention inward and allowing these or other feelings to emerge. I highly suspect that learning to admit to these emotions (even to yourself) will reduce their impact on your actual trading decisions.

Neuroeconomics and psychological science is totally rewriting the book on what emotion is and how to best handle it. Given the emphasis on controlling emotion in trading, doesn’t that mean we also have to rewrite the book on trading psychology?


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