In the Annual Review of Psychology 2015, Lerner of Harvard points out that from 1970 to 1995 there were virtually NO scientific papers on the subject of emotions and judgment and decision making (JDM). From 1995-2000 there were less than 50 a year and then it began to climb. The number of papers doubled from 2003-2007 and again from 2007-2011. In 2013, 450 papers addressed emotions and decision making!
To traders cognizant of the role of psychology in their success, this should matter. It means the truth of how a risk decision is made – the real relationship between emotion and trading decisions – is wildly different than was assumed before the early 2000’s. To quote Lerner “psychological scientists now assume that emotions are, for better or worse, the dominant driver of most meaningful decisions.”
This scares lots of traders. Every time I put it that plainly in my newsletter, I get quite a few unsubscribes. I submit that the astute trader will simply want to learn what science now knows and how to apply it in their risk assessment. The trader wanting to expand their edge will see this plethora of research as an opportunity.
It will become easier to hold winners and cut losers because the trader’s strategy for mental capital will be more effective. It is a case of finding the right tool for the job.