Experts Disagree Your Emotion Causes Irrational Trading Behaviour

This is an amazing documentary that begs the question:

“Are you a rational or irrational trader?”

I think you are going to be shocked by the real answer and the evidence that proves it.

Everyone [well almost] agrees that trading is driven by psychology but incredibly the world’s economy that depends so heavily on the activities of the various stock markets makes the assumption that people are rational when it comes to financial decisions!

Wow! If that were so then the last time you or I bought something on a whim i.e. just because we wanted it and for no other reason, we were making that decision and spending that hard earned cash totally rationally (not quite how my partner viewed my purchase of a guitar a couple of years back when I couldn’t play – well I always wanted one right!)

Give me a break!

In this documentary it shows ‘leading academic economists’ arguing that we all make financial decisions as if we were rational and then we see a cute little experiment that blows that idea apart as we watch a mixed group at a make shift auction bidding for a $20 bill and guess what?

Totally rationally two guys end up head to head and finally pay $28 for the $20 note – with the ‘loser’ having agreed to pay one dollar less at $27! Total spend for the $20 bill – 55 bucks!

Now call me insane for going against the views of ‘leading academic economists’ but does that seem rational to you?

The economic behaviourists say the desire to win is what pushed the price up but incredibly it was the desire not to lose that kept it going up until it exploded.

Funny though how many day traders sat at home trading are doing exactly the same thing every day – allowing the desire to win to govern their actions and then the desire not to lose to govern them even more.

Conversely, your desire not to lose (or as I call it your fear of losing) may cause you to allow a losing trade to run away from you or worse still ‘force’ you to add to the trade – totally rationally of course!

(BTW: Still not clear which of your own trading fears is causing your rational decision-making to be totally irrational? Then find out now by clicking here for my simple 15 second assessment to discover your dominant trading fear..)


So, paying a higher price for something even though you know it’s too much such as when chasing a trade might be driven by that desire to win making you behave irrationally.

Apparently, according to the experts in the film, it all comes down to what things are worth to you. According to some and the experiments shown in the film seem to confirm this, how much value you put on something has a strong influence on your perception of monetary value.

This is demonstrated in the film by an interesting experiment carried out in a shopping mall which also demonstrates why as a trader you might be suffering from the ‘fear of a profit becoming a loss’.

According to the psychologists this has to do with a phenomenon called present bias which basically means most people would rather take a monetary gain now than wait for a bigger monetary gain later.

Apparently, the rational decision is to wait for the bigger gain and this is what happens when the time factors are right (as you see in the film). However, and this is clearly the case for you as a day trader as you see your profits increasing and decreasing as you watch the chart, when the time factors are short almost everyone makes the irrational decision to take the lesser gain right now.

Ring any bells? Taking your profits too early? Struggling to allow profits to run? This sounds like your present bias kicking in ably aided and abetted by your fear of a profit becoming a loss.

Another interesting topic in the film is referred to as irrational exuberance (there’s that word irrational again!) and brain scans now clearly show that money is a stimulant for your ‘reptilian brain’ – the ancient part of your brain responsible for survival and the acquisition of basic needs and pleasures such as food and sex.

So it appears money is one of your pleasure stimulants just like sex and drugs (and a touch of Rock & Roll?) and interestingly enough your pleasure increases with ownership tenure. When you possess something it adds to the perceived value of that thing. The longer you have something the more valuable it becomes to you.

Now relate that to your trading and imagine how the longer you see your trade in profit i.e. you own that profit, the more valuable you will perceive it to be.

Wow! Is it any wonder then that your fear of losing has a field day with your emotions at this stage of a trade?

I hope you can agree with me that for anyone to think that financial thinking, buying decisions (just let your spouse loose in the shopping centre with a clean credit card), and day trading the markets can be totally rational, as the Rational Economists who advise governments and institutions believe, is completely irrational – if not plain nuts.

There is one thing this film highlights and that is that human beings are anything but rational and that powerful emotions such as fear and greed (they say in the film “uncertainty leads to panic”) both lead to irrational decisions and actions – and this can blow up markets as we saw in the 2008 Wall St crash and blow up your trading pot (as you may have seen yourself).

Let’s get honest here, trading is full of emotion and the most prevalent of these is fear so make sure you know exactly which of your most basic trading fears is making your irrational decisions and causing your irrational actions so you can do something about it.

In fact, why not do something about it right now and figure out the dominant fear that is killing your profits…

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