For Better or Worse, Human Ego Drives Capital Markets

There is no doubt that a primary driver of capital markets, for better or worse, is the human ego.  Depending upon which definition of ego you subscribe to (Freud did not invent the term), for purposes of this post, the essence of ego is primarily unconscious and self-serving.

Ego is not inherently good or bad but may be best considered as having great potential to be destructive; therefore the investment trader is wise to be aware of what ego wants and how it can be harmful.

Illusions commend themselves to us because they save us pain and allow us to enjoy pleasure instead.  We must therefore accept it without complaint when they sometimes collide with a bit of reality against which they are dashed to pieces. ~ Sigmund Freud

The ego is an illusionist.  If you, as both observer and the observed, are aware of ego’s illusion, however, the illusion ceases to exist.  In other words, ego and self-awareness cannot co-exist.

Awareness of ego (self-awareness) begins with understanding some of the things and some of the results that ego wants:

Awareness minimizes the negative effects of ego; awareness dissolves the illusion that ego presents.  The ego, however, is a natural function of human survival; therefore, it is not healthy to fight or deny the ego; and it is not necessary to be a PhD in psychology to counter it; simply be aware of it.

For the investment trader, there is only control over the individual trader's actions (not the market’s), and more importantly, the observation and reflection of those actions for improvement and future application.

If you’re fighting a trend, you’re defending your view. And that means you’re ignoring the market. When the ego is out of the way, the view doesn’t matter: you’re free to sit back, read the market, and follow its signals. Conversations, with markets and people, go much better if you maintain an open mind and simply listen. ~ Dr. Brett Steenbarger

As an investment trader, observe yourself; think about your thinking by asking questions:

Are you listening to ego or are you listening to the market?

Are you placing this investment trade to prove yourself right, to prove others wrong?

If the truth needs no defense, then why are you defensive?

Are you comfortable saying "I don't know?"

Do you find yourself reading only information and media sources that confirm your biases or do you read opinions of every variety, even those that disagree with your biases?

Are you trying to "beat" something (e.g. S&P 500 Index) or do you have a personal, concrete investment objective?

Do you rationalize decisions, not willing to admit mistakes?

Is your life a tool for money, or is your money a tool for life?

What personal practices do you apply to minimize the potential harm of ego?  Does self-awareness matter or does it add to "analysis paralysis?"  What do you think?  Or should I say, what do you think about thinking?

*****

Kent Thune is blog author of The Financial Philosopher.

Hmmm… Thought provoking…

Now may I return to THE PRESIDENT and his HISTORICAL signing of FIN REG?

Shall we declare a moment of silence and solemn rectitude in his honor for his utter beingness…

“If you're fighting a trend, you're defending your view. And that means you're ignoring the market.”

If the trend looks like a reject from Jackson Pollock’s practice sessions, its hard to tell whether it be friend or foe. One day, one month, three month, one year charts are all pointing in different directions.

Otherwise a resonant piece of writing.

Wow! You sound so genuine and a self-aware person!

Speaking of self-awareness, I bumped into your blog a few days ago thru’ your occasional comments here on TBP. And I said Hi and posted a simple hello comment, seeing something common in our interests and background, only to find out that you deleted my comment on your blog.

Perhaps you may want to become aware of your own motives/fears :)!

I am not seeking any response or attention. Just trying to make you aware of yourself.

Best.

vipasyana,

You talking to me? I don’t have a blog.

I tried to start one in 2004 and learned it was too much work creating original content. After two posts I decided I liked the ones that existed better. Now I cycle through the same five sites every hour to watch for market news. Sounds like you surf the same ones.

No Kidding: Sorry, I am talking about the author of the article and of the financial philosopher blog; assuming they are both same.

Sorry this is unrelated: I use firefox with popups blocked but that stupid GE ad interfered with the beginning of this article so I didn’t read it.

BR – you don’t need the income so bad that you block readers eyes from the articles you are writing/sponsoring/supporting. Kill the GE ads and all like them please.

@ NoKidding: Thanks for adding your thoughts. Much information (including this post) is abstract in nature. It sounds as if you have created your own concrete definitions and objectives with regard to trading (and perhaps life philosophies).

@vipasyana: I’m not sure what happened to your comment on my blog, The Financial Philosopher. I only manually delete comments that are obviously coming from people trying sell things not related to the content. I believe Barry calls these people “trolls.” With that said, I do not recall your comment and did not see your name in my deleted files. It is possible that the comment was never saved, which was not necessarily your mistake or mine; it happens from time to time with TypePad, the hosting service of my blog. I’ve even experienced my own comments “disappearing” before! I welcome your comments at any time and appreciate yours here today. Thanks for making me “aware!”

Kent Thune

An excellent entry from The Financial Philosopher on how the ego is an illusionist with a positive purpose. Research shows having a realist assessment of one’s situation is a better predictor of depression than any other factor. But then he propagates the prevalent, and erroneous, idea that this illusion can be overcome simply by conscious awareness. He goes onto to suggest some questions, that in their language, utilize a ‘trick of the mind’ that is not fully disclosed, and therefore might easily go awry.

For example: “Are you listening to ego or are you listening to the market?” presupposes you are outside of yourself (ego) and the market, and are impartially comparing the two. This idea of an Observer also predates Freud (as well as most of western philosophy), and has the requirement of seeing oneself (ego) as if as unknown another. This can usually be achieved by (mental) distance. That is, imagining oneself across a street is often sufficient, but shorter is not, and there in is the danger of thinking one is observing while partial to one’s ego.

One more: “Do you rationalize decisions, not willing to admit mistakes?” First, the question has a false equivalence. That is, rationalize = not admit mistakes. While “Not … admit[ing] mistakes” increases rationalizations. the fact is, we all rationalize since this brain function creates continuity and coherence in our experience. It is the origin of stories. Next, once something is rationalized (ie. given a story), we don’t think it’s a rationalization, so it becomes undetectable. To make this question work, simply reverse the order. “Willing to admit mistakes?” (anywhere/everywhere) and more to the point, “Do you readily admit trading mistakes to others?” If not, what rationalizations do you use. They will often have same ‘unconscious’ (out-of-awareness) structure.

A great site. Great posts. Keep up the very good work.

@lalaland

You need to install the Adblock Plus addon for FireFox in addition to blocking popups.

I never see any adds on TBP (or almost any other site for that matter). I don’t know how it affects the view count/click-through count for BR’s ad income stream so he may not appreciate me posting the link but I’ll do it anyway.

Hope this helps.

https://addons.mozilla.org/en-US/firefox/addon/1865/

Kent, I think you are channeling your inner Baruch Spinoza. As creator of The Financial Philospher blog, I’m sure your well aware of the two chapters in his “Ethics” devoted to overcoming (as appropriate, through understanding, i.e., through reason) ego as it is expressed through our emotions.

I found the following to succinctly describe some of the emotions experienced by traders, and explain some of their motivations.

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