In market transactions, while trading techniques are important, a good trading psychology is also indispensable. The fluctuation of the market and the profit and loss of transactions can cause changes in traders' psychology, leading to various irrational behaviors. The documentary "Trading Minds" conducts a comprehensive analysis and research on the "irrational" behavior of humans in financial activities, as well as the psychological and even neuroscientific factors behind it. The editor of this article will provide you with a simple interpretation.
Emotional Expectations Threaten Trading Happiness
Why do traders lose money, why do they make those irrational decisions, and why do they bear the risks that are considered foolish? What is the reason? American psychologist Daniel Kahneman has studied this and won the Nobel Prize in Economics in 2002 for this research. He inferred that traders do not always make logical decisions, but are constantly affected by various psychological factors, which in turn affect their perception of risk.
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Kahneman's research shows that making decisions in any given situation requires considering many elements. Prices, trading volume, and other dimensional factors all affect human psychology and further affect individual decision-making.
An experiment on behavioral economics shows that in a financial loss situation, everyone becomes a risk-taker. If we start to take more risks to avoid more losses, relying on bearing losses to compensate for transaction costs, once the losses continue to accumulate, the situation becomes completely irrational.
Some behaviors in the trading room and some excessive risk-taking are ultimately related to the trader's feelings, emotions, psychological state, and the mood of the day. The emotional expectations of traders create emotions, and the more emotional they are, the more inclined they are to take risks. That means that every successful trade will reinforce the trader's desire to continue taking risks, and it is this dangerous spiral that threatens the happiness of every trader.
Hormone Levels Strengthen Trading Decisions
About 10 years ago, former Wall Street trader John Coates left the market and became a neuroeconomist. Recently, he found that the level of male sex hormone testosterone plays a key role in the stock market's risk-taking by studying the saliva of nearly 200 financial practitioners - the level of hormones. The rise in testosterone levels drives you to be rational and excited, and drives you to increase risk-taking. John Coates said, the more testosterone a person produces, the more willing he is to make risky gambles.Former trader Jean Jacques Legendre stated that this hypothesis might be correct. We recruit young people who are highly self-aware and analytical, possessing a healthy level of testosterone. Within this group, there are usually some well-known crazy traders, and irrational behavior can also be observed.
Traders' greed and emotions are generated by their risk tolerance, and their fear leads to how they make decisions, while their hormone levels merely amplify this phenomenon. As for financial decisions, like our memories and feelings, they are controlled by billions of interconnected neurons that are covered over the skull.
A cognitive science research institute studied the brain's response after winning, and the results showed that the amygdala, basal ganglia, and prefrontal cortex were particularly active when a winning outcome occurred. Whenever a positive result appears, neurons at the back of the brain release dopamine, which then spreads to the amygdala, basal ganglia, and prefrontal cortex. These areas trigger a good feeling that spreads to other parts of the brain and the body. The more one wins, the more dopamine is released, and this process can drive a trader into a fully accelerated state.
Unfortunately, when you want to win more, most people will experience a downward spiral. Without dopamine, many traders will try to give up, but to maintain the previous good state, they still can't help but take a small amount of these hormones, which is a state of mental addiction.
Trading stress leads to mistakes
There is a lot of stress in the trading environment, and these stresses and emotions affect our choices. The current explanation is that when you relax, your brain encodes more positive things. Conversely, as long as you turn your mental state to a negative state of anxiety, it will eventually lead to negative results.
The brain essentially has two complementary thinking systems, one system based on our emotions, which is fast and automatic, and the other more rational system, which thoroughly analyzes the consequences of our decisions. But in the face of the mania in the trading hall, this consciousness is too slow and useless, so feelings usually cross rationality.
Under stressful situations, our brains lack enough time to adapt to trading rules, making it easy to make mistakes. From a scientific perspective, traders must have better training to handle their emotions. Otherwise, emotional outbursts can lead to unexpected results. Some people have also suggested replacing traders with computers, but the market still seems unable to completely get rid of human control, after all, there will always be traders in the trading hall.
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