Conventional wisdom still dictates that traders “control their emotions.” Yet somewhat conversely, the cutting edge of neuroeconomics research shows that “emotion determines how we perceive our world, organize our memory and make important decisions” (Brosh, 2013).
Ever wonder why you did the exact thing you planned not to? Ever marvel at how you said you would cut that loser or let that winner run and in fact, you did precisely the opposite? The answer as to why lies in another quote from neuroeconomics “It is not enough to know what should be done, one must also feel it” (Camerer et. al, 2005). Your intellect told you to behave in a certain way but a feeling (emotion) won out.
So yes it seems as if you could control that feeling, you would have held onto the winner. Logically however you really only needed to control the action or your behavior. So the real question is not how to control emotion but how to manage behavior? And the evidence is piling up on the side of embracing rather than controlling emotion.
The four ways traders typically deal with emotion:
- Submerge it into another trade.
- Rationalize it with the intellect.
- Distract oneself by staring at the tape.
- Actively feel it.
In fact, these four categories enumerate the general strategies for emotion beyond trading – sublimation, intellectualizing, distraction and self-awareness. In life, they all have their place but in an environment as provocative as trading, which one will help you make the most money?
Maybe ironically, given the “control your emotions” mantra, it’s the last one. Research shows that if you know what you are feeling – and particularly if you verbalize it – you are less likely to intend a certain action but be unable to carry it out. In other words, if you verbalize the worry that you will give money back or articulate the anxiety that you will get out of a trade at the worst point, you will be more likely to be able to wait for the winner or get out of the loser before it becomes a disaster.