Psychological Analysis by Adam Sarhan

Author:Adam Sarhan [Sarhan, Adam]
Language: eng
Format: epub
ISBN: 9781119282112
Publisher: Wiley
Published: 2021-12-13T00:00:00+00:00

THE DANGER OF EMOTIONAL LOGIC

I met an accountant once who made lots of great smart money decisions. He drove an old Buick sedan that he bought from an estate sale. The car wasn't fancy, and it wasn't pretty, but it was well‐maintained, had low miles, and it suited the needs of his family—and he bought it for a fantastic bargain price. Likewise, he bought his home at a foreclosure auction because the previous occupant had been convicted of serious federal crimes. He ended up with a palatial home on a three acre‐lot for the price of a three‐bedroom, two‐bathroom ranch‐style house in a suburban neighborhood. These were both highly practical, unemotional purchases. They were smart money purchases.

For most people, their home and their car are the most expensive things they'll ever own. Who among us has been able to make such unemotional decisions about our home or car? When we shop for a house, we often “fall in love” with a property where we can imagine raising our family or living out our golden years. Real estate agents rely on this. When we buy our automobiles, if we're honest, we're often more concerned about what the car says about us, whether it's suited to the level of success we feel we've achieved. A luxury car is something we may feel we “deserve.” Listen: it's okay to have a home we love; it's okay to drive a car that makes us feel good about ourselves—as long as they don't detract from our goals.

The point is that we need to know when our emotions are influencing our buying decisions because when we trade in the market, we don't need to love our stocks, and we don't need our trades to make us feel good about ourselves. We trade in the market to make money, and, as I hope you have learned by now, the smart money makes objective/rational decisions with their money, not emotional ones.

I once knew a trader who convinced himself he deserved a brand‐new Mercedes S‐Class—the big one. He had just had a good year, he told himself he “deserved” it, and he decided it would create the proper “air of success” with potential clients. The truth is he just wanted the biggest fanciest car he could possibly afford because it would make him feel good. He never drove around with his clients; he was using what I call emotional logic to reverse‐justify his decision to buy a top‐of‐the‐line status symbol luxury car.

Most people buy things based on their emotions and justify those decisions with “logic.” In most cases, they are using inferior logic that, by definition, is skewed because they have already made the decision and they manufacture some logic that is designed to support that decision. Dumb money uses this emotional logic to justify everything they buy—and especially their trades in the market.

In this business, money is your inventory. You use some (or all) of it whenever you want to buy or sell anything. So, it is of

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