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.


The Financial Philosopher said...

Thanks, Dr. Brett, for this post. I like your ideas on "the well-being hypothesis."

I believe well-being can be maintained by mindfulness and contentment, which are both learned with repetition.

This is not to say that people should go around controlling or suppressing their emotions and feelings.

Simply put, the awareness that one's judgment is compromised due to events combining to form "a bad day," is the beginning of mindfulness.

The traffic jam, as in your example, need not be "the straw that broke the camel's back." Being aware that the "bad day" has occurred, and it can (and will) end, and that the traffic jam was not caused by your car in a terrible wreck, can help change the perception at the moment.

Music helps too...

Thanks for provoking thought this morning, Dr. Brett...

Soberba Insônia said...

By the time i started to read this post, images have just begun to pop up.

I just saw how this well-being optimum state is very important not only for trading day in the markets, but for trading all the issues in our off-the-market life.

My image is that it works clearly as a shield. Once thee shield is mined, worries that didn’t affect our state of mind before gains a lot of weight and contribute to demolishing the rest of our dependable power of calmness and resolution.

I’ve been trying to attach myself some mental techniques from the Buddhism to regain my shield back, once I start to realize that I’m loosing it.

I know how to recognize the alerts that my mind is under attack (as you’ve mentioned, for example, the traffic jam situation). But the paces to regain it are not always that simple.

The curious thing that the market brought me up, is how you have to arrange and improve your life in all aspects that this shield works nicely for solving any obstacles that might appear in our road (all areas).

I have no doubt at all that we can use the market psychological implications to forge us better samurais in life, as we can use also use the off-the-market psychological implications to forge us better samurais in the market.

My only remaining question is if this ´training´ shall lead us to a simple way of facing life, or get us stuck into complexity, in order to offer us better ammunition to achieve results.

Keep up the good work, Brett.

JF Trader said...

Good post. Thank you.

Ariel said...

Nice points. Thanks Dr. Brett!

Do you find the MBTI relevant? Are there certain MBTI types for whom trading is a good fit? And others for whom it isn't? Any tips on certain types?

The Stock Speculator said...

As a trader, learning to accept loss helped me to get past the feelings of frustration that trading brings. Once my levels of frustration dipped to Regualr Joe levels, I could actually move away from a terminal for more than 30 seconds, and that my friend, = true happiness ;-)