Saturday, August 30, 2008

Learning to Win

Recently Brett Steenbarger wrote on his blog that the inability to deal with trauma is often a trader's enemy. Not sexual trauma, not childhood traumas, but the trauma of losing money.

Ever since Freud psychotherapy has labored under the notion that the best way to deal with trauma is to talk it out. It has recommended telling the story of your trauma, gathering up a few insights, and then pretending that you understand the meaning of what happened to you. This enhanced consciousness is supposed to constitute cure.

Need I mention that it never works. In some recent posts Steenbarger offers a good explanation of why. Losing money in a bad trade or in a series of bad trades sets up a conditioned response, one that bypasses thought and reflection. Negative experiences-- like losing money-- are more powerful and influential because they cause people to vow "never again." If you have been hurt badly at some activity the chances are good that you will avoid, not only that activity, but anything that remotely suggests it.

Steenbarger adds that since traumas bypass thought to create automatic responses they cannot be influenced by more and better thinking.

Let us say that a trader was traumatized by a loss? How will he conduct himself to avoid it every happening again?

He may be too quick to take small profits because he panics about the possibility that they will disappear. He might allow his bad positions to decline too long because he refuses to take a small loss.

In the end he might become accustomed to losing money because he has gained extensive experience at it. And he will accept it because he will feel that trauma has defined him as a loser.

No one is going to get over this by talking it out or talking it over or talking it through. No one is going to learn to win by discovering why he likes to lose or why he wanted to lose.

Once traumatized a person might well need a trading coach to guide him back into the markets. A coach will teach him how to get out of his Self and back into reading the markets. He will not do as many therapists do and puff up his self-esteem. As Steenbarger said: "It's not about thinking more positively about yourself; it's about removing the self from pure performance skill."

Still and all, someone who has gotten too used to losing must figure out some way to learn how to win. And as Steenbarger suggests, he must do it through experience, through the experience of winning.

How do you do that? East... you take up golf... or tennis or bridge. You go outside of trading to find an activity where you can learn to win with humility and lose with grace.

Golf is like meditation, only with a competitive kicker. You do not have to introspect to discover how good your concentration is... the trajectory of the ball provides an instant reality check.

Golf will teach you how not to get too full of yourself when you sink a long putt or make a great chip shot. It will teach you how to get your concentration back when your drive lands in the lake.

Similarly, with bridge. If you are not in the bridge world you may not know but a great many of the finest bridge players are also traders, generally options traders.

I would add here that children need to learn how to win and how to lose, that is, how to complete, when they are growing up. This ought not to need emphasis, but there are enough mentally-deficient educators in our country who want to ban dodge ball and spelling bees, to say nothing of grades, because they are afraid someone's feelings will be hurt. What they are really doing is creating children who are incapable of dealing with failure. It is a sorry legacy of the self-esteem movement, and one can only hope it has not infected too many school systems.


ANNE-MARIE said...

Terrific article, and oh so true

Adam said...

Perhaps the most important but least mentioned aspect of “Learning to Win,” is learning to lose. By this I don’t mean that losing should be a learned, habitual behavior. Learning to lose means learning to manage losses, whether they occur in romantic or professional life.

In financial markets in particular, learning to lose ~ managing losses ~ is the key to winning (making money), and may offer a fair analogy for how to view managing losses other areas.

If you buy a stock for $10 and the price declines to $5, do you “average down,” and hope an increase in price compensates you for both your bad decision, current loss and additional risk exposure?

If you experience a significant loss of value in a personal relationship, should you average down, invest in years of couples counseling, and hope for restoration of trust or a soothing of deeply felt injury?

I say, “hope,” as one has no control over market direction, just as one has no control over another person. Hope is ephemeral. The stock doesn’t know that you own it. Yet credible research in behavioral finance shows that averaging down on a stock price is the reflex action of the majority of investors. The same happens in relationships of all sorts.

Winning traders employ rules for managing losses. Strict adherence to these rules helps them avoid the emotional trauma associated with severe drawdowns of financial capital. Following rules in relationships may also help us avoid the emotional trauma associated with severe drawdowns of personal capital.

A successful trader’s rules for managing losses are not ones he tries to impose on the market. This would be a futile and self-destructive program. A successful trader designs rules to follow himself, and works constantly to avoid the temptation of breaking them.

Many relationships are based on attempts by the participants to each impose rules on each other. This is often a futile and self-destructive program. It may well be more useful to impose a behavioral framework on one’s self, including how one should behave when faced with losses in love or at work.

If we do this, when (not if) such losses occur and we have followed our rules, at least we can say, “I followed my own rules, behaved with honor,” and thus either rebuild or exit the situation garbed in dignity rather than the trauma provoked by misconduct.

Thus armed, we are better prepared to win.