Tuesday, August 21, 2007

Emotional Style vs. Content: What It Means for Trading

Psychological research documents a rich set of relationships between emotions and personality. One line of inquiry examines people's emotional style as being separate from--and interacting with--their emotional content.

Emotional content is *what* we feel. The balance between positive and negative emotion is a major determinant of emotional content. Research tells us that this balance is greatly influenced by two personality traits: extraversion and neuroticism. People who are high in extraversion--who are sociable and outgoing--report higher levels of positive emotion than those who are low in extraversion. On the other hand, people who are high in neuroticism report higher levels of negative emotion than those low in neuroticism.

Emotional content is important because it affects our processing of information. A large body of research finds that people who are high in neuroticism tend to be self-focused and selectively magnify the negative aspects of situations. Over time, this negative focus can interfere with mood, concentration, and motivation. Individuals who are high in extraversion, on the other hand, have a greater propensity for risk-taking--for better and for worse in the trading world.

To some degree our emotional balance is inherited: if your parents were high in neuroticism, you will have a greater likelihood of displaying the trait yourself. Because extraversion and neuroticism are traits, they tend to be relatively stable across the lifespan. While an introverted, neurotic individual may wish to become the life of the party through self-help techniques or psychotherapy, that outcome is unlikely. More realistic is that people with unfavorable traits can influence how these are expressed.

The ways in which we experience emotion is what is meant by emotional style. A major feature of style is the intensity of our experience. Some people tend to experience feelings very strongly; they have relatively high highs and low lows emotionally. Others are more moderate in their experience: they come across as relatively placid--never very high or low. What we feel and how we feel it interact to contribute to personality. We all know extroverts who are high in intensity--the stereotypic gambler comes to mind--and introverts who are low in intensity: quiet people who keep to themselves.

My experience with traders is that emotional style also interacts with content to affect our trading personalities. Style--the intensity with which we experience--acts as a kind of magnifying glass on emotional experience and thus can also magnify the biasing influences of emotion. The high intensity extrovert is the one most prone to overconfidence and impulsivity; the high intensity person high in neuroticism is most prone to panic and negative thinking.

This is why some of the most standard interventions in trading psychology involve strategies to enhance self-control. Such methods as meditation, biofeedback, and guided imagery help individuals reduce their level of intensity and thus gain control over any extremes of emotional content. In essence, these create emotional thermostats that help a trader modulate his or her experience.

Other interventions in trading psychology--cognitive restructuring work and behavioral methods for treating trauma come immediately to mind--are primarily aimed toward emotional content. By changing how we process information and by reprogramming our emotional responses to stress triggers, we shift ourselves toward a more neutral emotional balance. (The link below on techniques for dealing with emotional disruption of trading details some of these methods).

This is a helpful way of thinking about the kinds of assistance that might benefit a trader. Some traders have a relatively favorable emotional balance (content), but a style that can interfere with objective decision-making. They can benefit from self-control methods. Others have an emotional balance that is out of kilter, which may be magnified by style. They need ways of reprocessing their experience. The techniques used for self-help (or coaching) should be matched to the personality--the emotional composition--of the trader. One size does not fit all.

But what of those gut feelings that can help us make good decisions on the fly? In an upcoming post, I will explore the relationship between emotional style and intuitive decision making: ways of enhancing our access to the positive information underlying some emotional states.


Assessing Trader Personality

Techniques for Dealing With Emotional Disruptions of Trading

Overconfidence and Underconfidence in Trading