Why is it Psychologically Easier to go from Gains to Losses than Losses to Gains
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An excellent 10 minute TED Talk on psychology and how we handle negative information:
Ever wondered why it’s harder to mentally process and go from losses to gains than vice versa — and not just in trading, in situations in life too?
Why traders go through slumps that can be hard to reverse?
Why as legendary trader William Eckhardt said (paraphrasing) that the joy of winning never outweighs the pain of losing which makes trading an emotionally negative sum game?
Here’s why. It has to do with how our brains perceive and process negative information.
https://www.youtube.com/watch?v=7XFLTDQ4JMk
Image: Even though the economy recovered after the 2008 crash consumer confidence didn’t. “It may take more effort to change our minds about how the economy is doing than to change the economy itself.” — Alison Ledgerwood.
Alison Ledgerwood joined the Department of Psychology at UC Davis in 2008 after completing her PhD in social psychology at New York University. She is interested in understanding how people think, and how they can think better. Her research, which is funded by the National Science Foundation, investigates how certain ways of thinking about an issue tend to stick in people’s heads. Her classes on social psychology focus on understanding the way people think and behave in social situations, and how to harness that knowledge to potentially improve the social world in which we all live.
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I’m sure there is some evolutionary component that’s encoded in our DNA to be able to survive and so when “threatened” with potential issues to our safety, either physically or mentally we take greater caution.
There is also the fact that our survival has depended upon our hunter gatherer brains being able to make sure we “stand our ground in adversity.” This spells disaster to a trader with a losing postion. The flip side of the analogy is that our genetic traits required us to sieze opportunity (food was scarce), so in terms of profits that is why it’s harder to “let them run.”
So we’re basically not “wired” to trade. We have to fight every insstinct we have to do the opposite of what is evolutionarily coded into our DNA.
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