When Will It Stop? … (the advice that is)

The unexamined truism, old wives tale advice …

from a CNBC guest blog …scroll down the the part where it says this -“2. These are trading markets where the ability to execute without emotion is the key to success.”

I realize that neuroeconomics is a new field and that the word hasn’t gotten out yet but all facts of today’s latest science points to one of those truths we all know if we just stop and think. No human does anything without at least some emotion. We don’t get a glass of water without WANTING one and what is “wanting”?

In fact Seo and Barrett’s 2007 study showed that indeed being emotional and knowing it created the best investment performances out of a group of 20 active investors (traders) over a 100 day period.

Most of the problem lies in the reality that most traders and investors spend so much time trying NOT to be emotional that they lose the focus, insight and wisdom their emotions can provide…

And remember that emotion is a feeling – much like gut instinct is a feeling. Even when we choose variables for a quantitative model of investing (theoretically the most rational one) we do so with some feeling about why those variables are best.

Forgive me for the rant but in these markets, where clearly the feelings of fear interact with the fundamentals to create NEW fundamentals and new fear… the professional investing and trading community (even if no one else) desperately needs to understand the reality of how the human brain evaluates, decides and acts.

Attempting to do so without emotion only asks us humans to turn into computers and

1) it isn’t going to happen.

2) it is about the quickest way to send an emotion under-ground and into direct action via a hasty buy or sell that is later a source of regret… particularly on the advice of an expert (neuroeconomic reality).

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  1. Nice writing. You are on my RSS reader now so I can read more from you down the road.

    Allen Taylor

  2. Nice writing. You are on my RSS reader now so I can read more from you down the road.

    Allen Taylor

  3. —desperately needs to understand the reality of how the human brain evaluates, decides and acts.
    ———————————————————————————————
    Isn’t it that knowing about decision-making and behavioral biases or biases in probability and belief might help too
    I’m particularly aware, for instance of Base rate fallacy — ignoring available statistical data in favor of particulars, when making decisions.
    Seo and Barrett’s 2007 study helps me to understand a lot about emotions and investment performance !

  4. —desperately needs to understand the reality of how the human brain evaluates, decides and acts.
    ———————————————————————————————
    Isn’t it that knowing about decision-making and behavioral biases or biases in probability and belief might help too
    I’m particularly aware, for instance of Base rate fallacy — ignoring available statistical data in favor of particulars, when making decisions.
    Seo and Barrett’s 2007 study helps me to understand a lot about emotions and investment performance !

  5. Perhaps when the advice to “execute without emotion” is offered, the ‘expert’ intends to warn against ‘irrational’ emotions (i.e. exuberance, or the fear of missing out), and the harmful expression of those emotions.
    An understanding of human psychology is very important, but it seems a historically successful, well-defined, written trading plan can go a long ways in minimizing emotional conflict. Confidence in one’s trading strategy should help a trader execute more effectively and, in turn, grow to gain confidence in her execution skills.
    Without a well thought out and closely followed standard (trading plan), it is easy to have confirmation bias when looking at the charts.
    [Confirmation bias is the tendency to search for or interpret new information in a way that confirms one’s preconceptions and avoid information and interpretations which contradict prior beliefs.]
    The more spontaneous and subjective a trader is (without a plan), the more likely emotional intelligence diminishes.
    For the skilled professional trader with time and experience, intuition can play a key role, and the preceding sentence is less likely.

  6. Perhaps when the advice to “execute without emotion” is offered, the ‘expert’ intends to warn against ‘irrational’ emotions (i.e. exuberance, or the fear of missing out), and the harmful expression of those emotions.
    An understanding of human psychology is very important, but it seems a historically successful, well-defined, written trading plan can go a long ways in minimizing emotional conflict. Confidence in one’s trading strategy should help a trader execute more effectively and, in turn, grow to gain confidence in her execution skills.
    Without a well thought out and closely followed standard (trading plan), it is easy to have confirmation bias when looking at the charts.
    [Confirmation bias is the tendency to search for or interpret new information in a way that confirms one’s preconceptions and avoid information and interpretations which contradict prior beliefs.]
    The more spontaneous and subjective a trader is (without a plan), the more likely emotional intelligence diminishes.
    For the skilled professional trader with time and experience, intuition can play a key role, and the preceding sentence is less likely.

  7. Neal … may I submit there is no such thing as an irrational emotion? In other words, I don’t think rationality is the yardstick with which to evaluate emotions. They are just feelings and usually they make sense when you get to the root of them.

    What we need is a whole new approach to our thinking ABOUT our feelings… we will then have the tools to notice and interrupt biases of all types. imho.

  8. Neal … may I submit there is no such thing as an irrational emotion? In other words, I don’t think rationality is the yardstick with which to evaluate emotions. They are just feelings and usually they make sense when you get to the root of them.

    What we need is a whole new approach to our thinking ABOUT our feelings… we will then have the tools to notice and interrupt biases of all types. imho.

  9. “Isn’t it that knowing about decision-making and behavioral biases or biases in probability and belief might help too”

    Armin- I do personally believe that an intellectual understanding of the new model of decision-making is the first step.

    … and Chantal – Thank you.

  10. “Isn’t it that knowing about decision-making and behavioral biases or biases in probability and belief might help too”

    Armin- I do personally believe that an intellectual understanding of the new model of decision-making is the first step.

    … and Chantal – Thank you.

  11. Allen – Appreciate the subscription. … and your participation.

  12. Allen – Appreciate the subscription. … and your participation.

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