1/11/2011

You Get What You Want



Ed Seykota once said "win or lose, everybody gets what they want out of the market. Some people seem to like to lose, so they win by losing money."

The first time I read that I thought it was just Ed being cute. After trading for a few years I think I get what he means.

It's the same reason people continue to gamble long after they should have realized they will never win it back.

Just being in the game is enough of a high that people won't quit. Tis true for trading as well.

I have also changed my opinion on the loss aversion theory. The accepted concept is that people will hold on to losers forever so they don't have to realize the loss.

In short term trading the loss aversion theory keeps people in the game long after they should have quit. They may not hang onto losers anymore, but they are hanging on to the premise that they can make money in this business. That is why most people don't quit until the money is all gone. As long as they're "in the game" they have not lost it all.

Ariely talks about loss aversion affecting people who have been paid up front and then can lose that money based on their performance. He states that this causes even worse performance than paying people after the fact.

This is another way to think of trading. You have your trading capital and if you do not perform well it shrinks. This causes stress which lowers performance, and so on.

While Ariely is not talking directly about trading, the concepts regarding monetary stress affecting performance probably ring truer for trading than the ones he used in the experiments.

His work adds fuel to the idea that just focusing on the money in trading as the only scorecard you need is dead wrong. Ariely proves that focusing on the money is a sure fire way to lower your performance. He also talks about purely mechanical tasks that do respond well to financial incentives. This follows the Solfest premise that I could hire a 10 year old to trade my plan with financial incentives to take all valid patterns and financial disincentives for any MUTs (made up trades) and that 10 year old would have better results than me.

I came up with the hire a 10 year old theory only after the Solfest electrical shock system of punishing me for MUTs caused a local blackout.

Me and my giant cognitive brain get in the way of performing a very simple task.

Just trade the blue bars stupid.

Or if all else fails head to your local casino.



Or if that fails listen to this song over and over.

5 comments:

Sandy said...

I still have trouble with that, and its probably because I really haven't learned to lose gracefully. I hope in this life I can do that without ending bankrupt.

And I was meaning to read that book by Dan, thanks for the video link.

Solfest said...

I committed the cardinal blogger sin of editing after publishing.

Sorry, I think I'm done now.

Black said...

Thanks for the great post Solfest. Something that shd be drilled in me.

Long and Wrong said...

This isn't going to help people think we are not one and the same is it? I agree totally.

Solfest said...

That and my fake British accent.