Tuesday, November 24, 2009

The Well-Being Hypothesis: A Framework for Addressing Frustration and Lapses in Trading Discipline

The first post in this series highlighted the link between frustration and loss of discipline in trading. Stated in a different way, lapses of discipline tend to be state-dependent: we enter a frustrated, angry, confused, or discouraged state and that colors how we process and act upon information. A major way in which these states disrupt decision-making is by interfering with the cues that provide an experienced trader with his or her "feel" for the market. One of my best posts details how this happens.

There are many psychological techniques for quelling frustration, from cognitive techniques to change our thinking to behavioral, relaxation methods. Ideally, however, a trader's goal should be to prevent frustration in the first place.

This brings us to what I will call "the well-being hypothesis". (See this post for a detailed presentation of emotional well-being and its components). The hypothesis is that frustration tends to occur against a backdrop of diminished well-being. That is, if we are generally happy and satisfied in life, normal events that interfere with our goals will not be experienced as overwhelming frustrations. It is only when such well-being is relatively absent that the frustrations of normal life become emotional focal points.

Relationships are a good example. A happy marriage can weather the frustration of an occasional disagreement or conflict. I can think of plenty of disagreements in my own marriage, but I can't recall a time of yelling, arguing, or fighting. The disagreements occur against a backdrop of general goodwill and connectedness. If we lacked the well-being that comes from common values, shared experiences, and an emotional bond, it would be easy for those frustrations to accumulate and fester.

Similarly, when I'm having a good day and everything seems to be going my way, getting caught in traffic is but a minor annoyance. I turn on the music in the car and make the most of my wait. If it's been a day without gratification, however, the traffic jam just might be the straw that breaks my emotional back, causing me to fuss and fume throughout the wait.

Happy, satisfied people, on average, don't experience frustration to such a degree that it will dominate thought and behavior. Indeed, for a reasonably fulfilled person, stresses can actually contribute to well-being over time.

If the well-being hypothesis is correct, then an important way to prevent frustration--and hence its disruptions of trading--is to maximize positive emotional experience. Said in another way, the problem with discipline may be as much about a lack of positive experience in trading as the presence of overwhelming negatives. Instead of working to eliminate frustrations--probably an impossible task--we need to find ways to sustain well-being during the most challenging market periods.

The next post in this series will address this challenge.