Self-Control: The key to trading and the key to success in life

I was just reading this article in The New Yorker and I am impressed by it so much so that I’d like to log this in my trading journal.

The article is about a simple study done in the 60′s with hundreds of kids being asked to resist the temptation to a table-full of candies while waiting for the researcher to come back into the room. Years later, the researcher find that those that is able to delay instant gratification are more successful later in life.

I’ve read about this study before, but this article is a lot more comprehensive than what I’ve seen. Anyway, read the article for the details.

So what’s so special about having self-control? The article and the researcher puts it poignantly.

For decades, psychologists have focussed on raw intelligence as the most important variable when it comes to predicting success in life. Mischel argues that intelligence is largely at the mercy of self-control: even the smartest kids still need to do their homework. “What we’re really measuring with the marshmallows isn’t will power or self-control,” Mischel says. “It’s much more important than that. This task forces kids to find a way to make the situation work for them. They want the second marshmallow, but how can they get it? We can’t control the world, but we can control how we think about it.”

And how are some of these 4-year-old doing it?

At the time, psychologists assumed that children’s ability to wait depended on how badly they wanted the marshmallow. But it soon became obvious that every child craved the extra treat. What, then, determined self-control? Mischel’s conclusion, based on hundreds of hours of observation, was that the crucial skill was the “strategic allocation of attention.” Instead of getting obsessed with the marshmallow—the “hot stimulus”—the patient children distracted themselves by covering their eyes, pretending to play hide-and-seek underneath the desk, or singing songs from “Sesame Street.” Their desire wasn’t defeated—it was merely forgotten. “If you’re thinking about the marshmallow and how delicious it is, then you’re going to eat it,” Mischel says. “The key is to avoid thinking about it in the first place.”

So what does this have to do with trading?

In adults, this skill is often referred to as metacognition, or thinking about thinking, and it’s what allows people to outsmart their shortcomings. (When Odysseus had himself tied to the ship’s mast, he was using some of the skills of metacognition: knowing he wouldn’t be able to resist the Sirens’ song, he made it impossible to give in.) Mischel’s large data set from various studies allowed him to see that children with a more accurate understanding of the workings of self-control were better able to delay gratification. “What’s interesting about four-year-olds is that they’re just figuring out the rules of thinking,” Mischel says. “The kids who couldn’t delay would often have the rules backwards. They would think that the best way to resist the marshmallow is to stare right at it, to keep a close eye on the goal. But that’s a terrible idea. If you do that, you’re going to ring the bell before I leave the room.”

In other words, we need to identify our psychological issues in trading and react to them before they destroy our accounts! One way I’m doing this now is using a set of clear and objective rules.

Move from Certainty to Curiosity to improve your trading

The major reoccurring problem I have in trading is not being objective enough in my decision. A recent example is entering the market just before the October crash and held on to the shares even when I doubted my positions. On the other hand, for the times when I executed a trade as planned, I showed remarkable ability to make sound decisions on the fly even under strenuous conditions. Thus, it is in my best interest to perform consistently and learn to be objective in my market analysis.

I have come up with two solutions for my problem. 1) Make more use of computational tools and 2) improve my trading psychology.

In this particular post, I’d like to address my psychological barriers. Coincidentally, a book I’ve been reading about conflict resolution (Stone, et. al., “Difficult Conversations,” pg 38+) has suggested techniques that I think can be applied for trading.

When it comes down to it, we argue with other people because of difference of opinions. Similarly, we lose money in the market because we are arguing with the market. The first step in conflict resolution is understanding ourselves.

As best as we might try to remove emotion in our trading decision, the tendency to develop unconsciously biased perception is very human. Our perception about a situation is based on

1. our selection of information
2. our interpretation
3. our conclusion

Some people use candlestick charts, some uses line graphs. A bullish crossover on the RSI can mean a turn of sentiment to some or imminent opportunity to short for others. These are just some examples of how we add our personal touch to each problem. Indeed, I don’t think eliminating emotion from the equation is advisable. It is our experience, our knowledge, and our skills that we should rely on to make tough decisions. Since decisions happen so fast and generally involve more subconscious than not, we are not aware of all the influences of our views.

One way to keep an unbiased opinion is to thoroughly understand how you came to a conclusion. Why did we select one information over the other? What assumptions are we making in an interpretation? How did we come up with a conclusion based on our interpretations? In other words, shift from a certain stance about our conclusion to a curious state about the entire thinking process.

One way to shift your stance from the easy certainty of feeling that you’ve thought about this from every possible angle is to get curious about what you don’t know about yourself.

Keeping an open mind with a curious approach can help you evaluate wether your views make sense in light of new information and perspective.

For example, the way I analyze a potential trade entry is to think from both sides of the trade (go long or go short). Ultimately, I enter the trade as planned if my analysis is stronger than the counter-arguments.