Monday, January 07, 2008

The Limits of Self-Esteem

If there is an overworked notion in psychology, it's that individuals have problems because of "low self esteem". If only we can feel better about ourselves, the reasoning goes, all will be well and we'll perform up to our potentials.

As it turns out, this doesn't appear to be the case. Research suggests that improvements in our views of ourselves may not be an emotional cure-all. Indeed, the degree to which self-esteem is contingent upon other factors may be more psychologically important than a given level of esteem. Simply feeling good about oneself does not appear to lead to better performance in life.

While it is true that self-doubt and a lack of self-confidence can interfere with trading decisions, it is equally true that overconfidence and an unrealistic assesment of one's skills can lead to ruin. Research in behavioral finance suggests that, if you show traders charts generated by random number sequences, they will--as a whole--be more inclined to overestimate than underestimate their prowess at divining future market movements. And those with the greatest overestimation will be most susceptible to trading losses.

It is not at all unusual, in trading chat rooms and seminars, to find traders who have no problem valuing their own skills, despite no evidence of achieving consistent, superior returns and managing significant portfolios. On the other hand, most if not all of the very successful traders I've worked with are quite circumspect about their abilities. They are always seeing areas that need improvement, and they're always cognizant of risk, aware that large potential losses are only a trade away.

One of my favorite bumper stickers reads, "Forget world peace; visualize using your turn signal." That's pretty much how many fine traders approach their careers. They're not sitting around visualizing grand outcomes. They're immersed in the blocking and tackling--the sound trading practices--that make for the next profitable trade.

And maybe that's what has me writing this post. The really good traders aren't thinking good things or bad things about themselves. They're not thinking about themselves at all.

They're immersed in the markets.

If you're thinking about how good you're doing, how badly you're doing, your recent P/L, your hopes for future profits--all of that is a distraction from being focused on markets.

And *that* will affect performance.


Self Efficacy and Goal Attainment

Building Self-Efficacy

Self Confidence and Performance

Self Evaluation and Trading Success