Today I share with you some of the views of the esteemed trading psychologist, well-known author - and a personal favourite of mine - Brett Steenbarger - a man with extensive knowledge of how our minds work, both for and against our trading success. Steenbarger has a theory of keeping an ‘empty mind’ when it comes to trading, so that our preconceived notions don’t cloud our judgment.
In his book ‘Deep Survival: Who Lives, Who Dies, and Why’, Laurence Gonzales describes a research project conducted by Harvard psychologists.
The researchers showed subjects a film of basketball players passing the ball to each other. Then, in the middle of the film, a man in a gorilla costume entered the middle of the action and remained visible on the screen for about five seconds.
One group of subjects was asked to count the number of passes amongst the players, whilst the other group was simply told to watch the film. The result? Researchers found that 56% of the subjects who counted the passes didn't even see the gorilla; on the other hand, those asked to simply watch the film noticed the gorilla on the court.
What was going on in the subjects’ minds here? Well, one group was told to look for passes, so they programmed their brains to search for passes – blocking out all other information. The other group wasn’t limited in their searching scope, so they noticed the gorilla. In other words, in keeping an ‘empty’ mind, they were able to receive a wide range of inputs.
The bias problem
Steenbarger uses the above example to demonstrate that humans see what they want to see – we are all subject to the mental maps we create.
We see this in trading behaviour all the time. A trader may start out with an opinion on a trade without becoming familiar with the realities of the market, causing them to give greater emphasis to information consistent with their opinion. In other words, a trader’s preconceived notion will make them biased when they take in information: they’ll stick with their original view, rather than give weight to information that seems contradictory.
Overvaluing our trades
We find the same bias with trades we already have in our portfolio. Once we own stock in a company, our tendency is to overvalue it. This is because we are tempted to think: ‘Well, I was smart in choosing the trade in the first place, so the trade is – and should continue to be – a valuable stock’. This is a clear-cut case of the trader seeing what they want to see. The reality is that stocks change in value all the time and we have to keep an open – or empty – mind, so we don’t become blind to new realities.
Open up your ‘search mode’
Steenbarger likened the human brain to a search engine. Our brains are ‘Googlers’ of reality. We look for what we want to search and eliminate any other information. The problem is that when you’re looking for something specific, you won’t be looking at all the information necessary to survive in an environment of risk and uncertainty – like the stock market. That’s why, when approaching the market - and in particular new trading opportunities - you need to keep your Google-brain on a broad search.
It can be dangerous to develop a pre-conceived hypothesis about the market or a stock, because you will automatically be searching for certain indicators or particular chart patterns that ‘confirm’ your views. In your rush to find what you are looking for, it’s possible – as Steenbarger puts it – to miss the ‘gorillas’ in the market, and it may be a crucial gorilla in the trading mist.
Reprogram your brain
Gonzales provided an excellent formula for trading success, which is to approach trading with both boldness and humility. That is, you should have the boldness necessary to trade with conviction and the humility to realize that you could be 100% dead wrong, when the market provides you information that conflicts with your original view.
So when you start to think about your next trade, remember to check your preconceived notions at the door.
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