The Mental Edge in Trading by Jason Williams

Author:Jason Williams
Language: eng
Format: epub
Publisher: McGraw-Hill Education

CHAPTER 18

Optimism and Trading

The human trait of optimism is somewhat related to confidence but is not quite the same thing. Optimism relates more to how positive one feels about the outside world, while confidence is how positive you feel about yourself. Optimism is best accounted for on the E6 (positive emotions) facet of the NEO-AC.

People who are overly positive, or overly optimistic, tend to see the world through “rose-colored lenses.” They tend to overlook, filter out, or even flat out ignore negative information, all the while seeking out evidence that confirms their positive outlook. They see what they want to see.

Traders who are high in E6 may forget about certain losing trades (or the negative consequences, punishments, or lessons related to those trades) and retain strong (maybe even exaggerated or false) memories about their winning trades. Their minds filter out data, so they see the pros and not the cons of a situation or idea. The search for confirming data and the forgetting of unsupporting data are actually a form of a psychological defense.

The human mind can be very selective about the data it takes in. An experiment at Harvard in 1999 proves the point. If you do a web search for “The Invisible Gorilla,” you can learn more about, and even see with your own eyes, this experiment. In a nutshell, experiment subjects were instructed to watch a short video of a group of young people passing basketballs back and forth to each other. Half of the people in the video were dressed in white shirts; the other half were in black shirts.

Two groups of viewers watched the video. The task of one group of viewers was to count how many times the people in white shirts passed the basketball. The task of a second group of viewers was to just casually watch the video. Smack dab in the middle of the video a person dressed up in a gorilla suit and mask in plain sight walks and dances across the video screen. At one point the gorilla clearly turns and looks straight at the camera, and hence the viewers. There is no subtlety to the gorilla; he is right there staring directly at you! But it turns out that, while everyone who was asked to watch the video passively noticed the gorilla’s presence, only 56 percent of the viewers who were counting ball passes noticed it. The study shows how the human brain really does filter out data and sensory input all the time—and not just minor details!

For those traders who score very high in E6 (optimism, that is, feeling overly positive and sure about the expected outcome of an event) or are very high in C1 (you have great attention to detail, but are also prone to overconfidence), there is an incredibly big chance you are going to miss the elephant (or gorilla) in the room. The overly optimistic person, it turns out, has difficulty seeing or accepting something that may be plainly obvious to others.

Keep in mind that it’s not that the person is blind to the evidence or not smart enough to understand it.

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