Tag Archives: psychology

Common Psychological Pitfalls in Trading

Reading through a short article on the Turtle Traders website about trend following there is a short list of common pitfalls in trading. Out of those I have recognized a few that I believe I have an issue with…

Anchoring and adjusting
In considering a decision, we often give disproportionate weight to the first information we receive, hence anchoring our subsequent thoughts. You can mitigate this risk by seeking information from a variety of sources and viewing various perspectives.

Improper framing
The decisions of investors are affected by how a problem, or set of circumstances, is presented. Even the same problem framed in different, and objectively equal, ways can cause people to make different choices. Framing, too, plays a central role in assessing probabilities.

Irrational escalation of a commitment
Investors tend to make choices that justify past decisions, even when circumstances change. To avoid this trap, investors must only consider future costs and benefits.

Confirmation trap
Investors tend to seek out information that supports their existing point of view while avoiding information that contradicts their opinion.


In the zone: the nine elements of “flow”

Mihalyi Csikszentmihalyi, former chairman of the department of psychology at the University of Chicago, a well-known research psychologist has spent most of his life studying this state, which he calls “flow".

Csikszentmihalyi identified nine elements of flow that he saw repeatedly in his research:

1. There are clear goals every step of the way. In many everyday situations, there are contradictory demands and it’s sometimes quite unclear what should occupy our attention. But in a flow experience, you have a clear purpose and a good grasp of what to do next.

2. There is immediate feedback to one’s actions. When you’re in flow, you know how well you’re doing.

3. There is a balance between challenges and skills. If a challenge is too demanding compared to your skill level, you get frustrated. If it’s too easy, you get bored. In a flow experience, there is a pretty good match between your abilities and the demands of the situation. You feel engaged by the challenge, but not overwhelmed.

4. Action and awareness are merged. People are often thinking about something that happened – or might happen – in another time or place. But in flow, you’re concentrated on what you’re doing.

5. Distractions are excluded from consciousness. Because you’re absorbed in the activity, you’re only aware of what’s relevant to the task at hand, and you don’t think about unrelated things. By being focused on the activity, unease that can cause anxiety and depression is set aside.

6. There is no worry of failure. In a state of flow, you’re too involved to be concerned about failing. You just don’t think about failure. You know what has to be done and you just do it.

7. Self-consciousness disappears. People often spend a lot of mental energy monitoring how they appear to others. In a flow state, you’re too involved in the activity to care about protecting your ego. You might even feel connected to something larger than yourself. Paradoxically, the experience of letting go of the self can strengthen it.

8. The sense of time becomes distorted. Time flies when you’re really engaged. On the other hand, time may seem to slow down at the moment of executing some action for which you’ve trained and developed a high degree of skill.

9. The activity becomes “autotelic” (an end in itself, done for it’s own sake). Some activities are done for their own sake, for the enjoyment an experience provides, like most art, music, or sports. Other activities, which are done for some future purpose or goal – like things you have to do as part of your job – may only be a means to an end. But some of these goal-oriented activities can also become ends in themselves, and enjoyed for their own sake. Csikszentmihalyi concludes by saying that “in many ways, the secret to a happy life is to learn to get flow from as many of the things we have to do as possible.”

source: Dr. Steve Wright | meaningandhappiness.com