Tuesday, August 26, 2014

Success in Trading: Why Mindset Matters

Psychologist Carol Dweck makes an important distinction between fixed mindsets and growth mindsets.  When we praise a child's fixed qualities, we anchor their self-concepts to those qualities and, ironically, create a less resilient set of behaviors going forward .  When we praise process--such as trying hard at something--we encourage the behaviors that ultimately lead to success.  

In a fascinating study, Dweck gave two groups of children a relatively simple puzzle test.  One group was praised for their intelligence; the other group was praised for their effort.  Then both groups were allowed to select a second set of puzzles to work on.  When praised for effort, 90% of the kids chose the harder set of puzzles to work on.  When praised for intelligence, the majority of children selected an easier set of puzzles.  The children who anchor their sense of self to a fixed quality behave in a conservative way to protect that self-image.  The children who anchor themselves to what they do, simply do more.

"Emphasizing effort gives a child a variable that they can control," Dweck explains.  "They come to see themselves as in control of their success.  Emphasizing natural intelligence takes it out of the child's control, and it provides no good recipe for responding to a failure."

Indeed, when given difficult puzzles and then given the opportunity to work further on them, children praised for effort tend to persist.  Children praised for intelligence tend to give up.

This casts a fresh light on the common observation that traders are in trouble when they become more concerned about being smart than about making money.

If we seek self-validation from markets based on our ability to outsmart the crowd, we will be psychologically vulnerable during inevitable periods of drawdown.  If we are process-anchored to our growth, development, and effort, we can generate positive emotional experience even during challenging times.  

How do you respond to setback?  As challenge?  As threat?  By redoubling efforts?  By abandoning them?  Simple differences of mindset may account for large differences in the development of expertise.

Further Reading:  Emotional Resilience in Trading