Ego: Illusionist, Trader’s Nemesis
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:
- Ego wants to be heard: It is the inner voice that chatters endlessly in your mind.
- Ego wants to be “right:” It wants you to believe that your successes are self-created and that failures are anomalies: “I can predict financial market movements.” “I was right before, I will be right again.” “This mistake is a fluke.” “What the market (the herd) is saying is wrong.”
- Ego wants to thrive and survive: It consumes messages that give it energy; it looks for information that confirms its biases (i.e. If the bias is toward falling stock prices, ego wants information supporting falling stock prices and economic recession; and ego ignores information supporting rising stock prices and economic growth).
- Ego wants to compete: It wants to win and for others to lose; it wants to make more money than your neighbor; it wants to be right; and it wants to prove others wrong.
- Ego rationalizes: Losses are perceived as temporary setbacks; successes are affirmations of “I am right.”
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.
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July 21st, 2010 at 11:31 am
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…
July 21st, 2010 at 11:43 am
“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.
July 21st, 2010 at 11:56 am
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.
July 21st, 2010 at 12:04 pm
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.
July 21st, 2010 at 12:09 pm
No Kidding: Sorry, I am talking about the author of the article and of the financial philosopher blog; assuming they are both same.
July 21st, 2010 at 12:14 pm
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.
July 21st, 2010 at 12:28 pm
@ 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
July 21st, 2010 at 12:45 pm
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.
July 21st, 2010 at 12:48 pm
@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/
July 21st, 2010 at 1:18 pm
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.
Proposition 31 of Part III, Concerning the Origin and Nature of Emotions:
If we think that someone loves, desires or hates something that we love, desire or hate, that very fact will cause us to love, desire or hate the thing more steadfastly. But if we think he dislikes what we love, or vice versa, then our feelings will fluctuate.
And Proposition 32:
If we think that someone enjoys something that only one person can possess we shall endeavor to bring it about that he should not possess that thing.
July 21st, 2010 at 1:36 pm
@faulkner: I appreciate your input and humbly admit that I learn as much from reader comments (like yours) as I do from reading books! The idea of Observer, to my knowledge, and as you say, is not Freud or western philosophy, but predominately that of ancient eastern philosophy, such as Zen Buddhism. The idea of self-awareness negating or neutralizing ego is loosely based upon the idea of enlightenment.
With regard to “rationalize = not admit mistakes,” I am referring to rationalize as meaning something like this from Webster’s online definition:
b: to attribute (one’s actions) to rational and creditable motives without analysis of true and especially unconscious motives ; broadly : to create an excuse or more attractive explanation for
If you make a mistake, for example, you do not admit it as a mistake: You “create an excuse or more attractive explanation” for your actions (i.e. not a mistake but some other explanation for the behavior or outcome of behavior) .
With that said, I will revert to ancient western philosophy, specifically to Socrates, and say that I am aware of my own ignorance and there is much that I can learn.
Please let me know if you still believe my use of “rationalize” is not appropriate.
Thanks for the discussion.
Kent
July 21st, 2010 at 1:44 pm
@ The Curmedgeon: I’ve never read Spinoza but do believe that there is no such thing as original thought! My knowledge of philosophy does not come from that of academia, but from self study over the past several years.
“All truly wise thoughts have been thought already thousands of times; but to make them truly ours, we must think them over again honestly, till they take root in our personal experience.” Johann Wolfgang von Goethe
“You do not get to philosophy by reading many and multifarious philosophical books, nor by torturing yourself with solving the riddles of the universe… philosophy remains latent in every human existence and need not be first added to it from somewhere else.” ~ Martin Heidegger
July 21st, 2010 at 1:57 pm
@ Kent, self-study here, too. But I highly recommend Spinoza. He is all about understanding how our egos create illusions, and that to free ourselves from the bondage of our emotions (which he equates to our egos), we must objectively understand the emotion.
His philosophy’s been called “radical objectivity” by Rebecca Goldstein, an author and philosophy professor.
As you say, there are no original thoughts. But there are great and original thinkers. Spinoza, a heretic* Jew living in Amsterdam in the mid-1600′s, was mostly definitely that.
*He was excommunicated, or what amounts to it, by his Jewish community, probably for his belief that the Torah was essentially one long rationalization and justification by the Hebrews for who they were and what they did. He was also one of the first to point out that the Torah could not have been written by Moses–a view generally accepted amongst rationalist theologians today.
July 21st, 2010 at 2:07 pm
OK, my ego is in check. I want to follow the trend. How do I do that?
July 21st, 2010 at 2:40 pm
Not sure where exactly the “trend” is now? Sideways, perhaps?
July 21st, 2010 at 2:47 pm
The real question is at what point do you decide that you’re wrong and eat your humble pie, vs. when do you believe in yourself and maintain your position. If you bail at the first moment the market moves against you, well, you might as well just be a buy-and-hold investor (not that there is necessarily anything wrong with that, long term).
On the other hand, if you are a “stick to your guns at all costs” type, then the market is eventually going to be irrational longer than you can stay solvent and enjoy eating your lunch for you.
Some things that would help would be “tales from the trenches” about how people navigate that decision. What are the things that convince people they are wrong, and how do people decide to hold on. If you are using purely technicals, I think it may be easier: you have a set of rules and stick to them, but if you are acting on some kind of fundamental view, it’s a lot trickier.
Some of this is where finding good risk-reward scenarios are good, so you can afford to be wrong a few times and still make money, but there is little more frustrating than finding your stops are hit, and then the market going roughly where you had originally intended it.
July 21st, 2010 at 2:52 pm
@The Curmudgeon: I’ll take a look at Spinoza. I do know about him, especially because he sometimes appears in discussion of “existentialism.” Among this group, I am familiar with (and enjoy) Kierkegaard, Nietzsche, Heidegger, and Sartre.
Thanks for the recommendation…
Kent
July 21st, 2010 at 2:57 pm
Kent,
Good stuff.
July 21st, 2010 at 2:58 pm
“…I want to follow the trend. How do I do that?”
mrmike23,
get out a straight-edge (ruler) and Crayon…(see nearby thread (w/Charts), for an ex.)
~~
and, back toward the Post, Observation is, surely, the Root–from which, Objectivity stems, and Awareness flowers..
~~
also, for some general ‘Spinoza’-linkage
http://search.yippy.com/search?input-form=clusty-simple&v%3Asources=webplus&v%3Aproject=clusty&query=Baruch+Spinoza
Curm,
it’s a good suggestion, on the Path to ‘Enlightenment’, Spinoza moved, more than, a few heavy boulders(out of the way)..
July 21st, 2010 at 2:59 pm
O, and, Kent, nice Post~
July 21st, 2010 at 3:05 pm
Get over yourself (ego goo) and don’t follow leaders (shine-on the tiny logic); watch your parking meters (P/L on the trade). Dive into Spinoza; don’t just look: he was there first. Choose wisely.
July 21st, 2010 at 4:23 pm
OK, I’ll “dive in” to Spinoza, rather than “just look.” I found Spinoza’s “Ethics” in one of my Western Philosophy anthology books. I’ll start there and keep going…
Blanket thanks to all who commented and to Barry for letting me post my thoughts here from time to time…
“I write to keep from going mad from the contradictions I find among mankind — and to work some of those contradictions out for myself.” ~ Michel de Montaigne
July 21st, 2010 at 4:34 pm
I follow my own trends and only occasionally do what the voices in my head tell me to do. I also like to follow the person in front of me because it usually looks like they know where they are going and I will end up where I need to be (thanks, Dirk Gently … excellent advice)
July 21st, 2010 at 5:33 pm
Kent,
RE: Your use of “rationalize.”
It’s not your definition of the term ‘rationalize.’ It’s the (logic) structure of the sentence.
[My professional background includes linguistics with an avid interest in neuroscience.] Thus, what follows:
From the research of Roger Sperry on brains, to Michael Gazzaniga on memory, to the applications made by Martin Seligman (Learned Optimism), it’s been established that there is NO connection between an act (including a decision), and it’s subsequent explanation, rationalization or (in everyday language) excuse. That means all acts are to some degree rationalized – ie. brought into continuity and coherence with other memories and norms, one’s ‘life story,’ or if you prefer, ego. Certainly, not all acts are unadmitted mistakes, though noticing what comes to mind following a mistake one refuses to admit to is a good way to notice typical rationalizations.
As you asked for “personal practices to apply to minimize the potential harm of ego,” I suggest noticing what explanations (polite form), rationalizations (pre-judged form), or excuses (pejorative form) one is using. Making a list of these everyday utterances as they come to mind and/or out of mouth is likely to reveal a similarity of language structure (and perhaps metaphor). We can not help but respond to these largely unconscious images, ideas and forms of thought. See Seligman for some simple, and effective, examples. All the best.
July 21st, 2010 at 6:05 pm
When you say, “all acts are to some degree rationalized,” I begin to understand your explanation.
I also find your background in linguistics and neuroscience fascinating! Are you familiar with Martin Heidegger? He is a 20th century philosopher that placed an emphasis on language as the vehicle through which the question of “being” could be unfolded.
“Man acts as though he were the shaper and master of language, while in fact language remains the master of man.” ~ Martin Heidegger
Thanks again for the interesting and insightful comments.
All the best to you…
July 21st, 2010 at 11:16 pm
Very nice. My ego feels companionship. Hmmmmm.
July 22nd, 2010 at 2:14 pm
After Professor Marshall McLuhan,Yogi Berra and Chairman Mao:
Media is the fork that takes us to the road we make by walking on it.