Thursday, February 28, 2008

Emotions and Trading: Understanding Depression

In my recent post, I talked about a group of emotions related to anxiety and stress and how those affect trading. We also took a look at how risk management can also be a strategy for anxiety management. In this post, we'll begin a look at trading emotions related to depression, including discouragement, loss of confidence, persistent negative thinking, and loss of motivation and drive.

Just as anxiety can be a normal response to perceived threats to our values, the various emotions related to depression can be a perfectly normal response to loss. Feelings of anxiety occur when we fear the loss of something important to us; depressed mood sets in when we're faced with such a loss.

There are diagnosable disorders of anxiety (generalized anxiety disorder, panic disorder, obsessive-compulsive disorder), and there are mood disorders related to depression (major depressive disorder, dysthymia, bipolar disorder). Anxiety and depression are diagnosable when they are persistent and significantly interfere with a person's normal functioning. For example, a significantly anxious person might not be able to leave his home; a significantly depressed person may lack the energy to get out of bed and participate in work and social life.

The majority of people, however, experience moods and feelings related to anxiety and depression at a "subclinical" level. They continue to function in work and relationships, and their moods are often tied to very real threats or losses that they might face in their finances, their jobs, or their marriages.

As social psychologist Jack Brehm has observed, we can think of the depressive emotions as a kind of motivational suppression. When our values are active, they motivate us to action: we are hard-wired to pursue that which we find life-enhancing. It would not be adaptive, however, for us to be motivated to pursue unattainable ends. In the face of loss, therefore, we experience a suppression of motivation--a dampening of our pursuit for what we had valued. It is this dampening that we experience as a depressive feeling. It is perfectly normal, and it is common.

The problem for traders occurs for depressive emotions as for fear-related ones: these emotions are responses to *perceived* threat and loss--not necessarily actual threats and losses. If we perceive that our future as a trader is lost (or if we perceive that there is no way we can make money during a difficult market period), we can respond emotionally and motivationally with suppression. We become discouraged; we lose our drive to persevere; we slip into modes of negative thinking that kill our drive. If we are perfectionistic and perceive *every* trading loss as a failure, then we can wrestle with negative, depressive emotions on a very regular basis--even if the actual, financial losses are minimal.

The cognitive hallmark of anxiety is worry. The cognitive hallmark of depression is negativity. In an auto-immune disease, the body's immune system turns against the body itself, treating the body as a foreign invader. Depression is a kind of emotional immune system, in which we expel goals that are not appropriate or attainable. Depression becomes an auto-immune problem when we turn against entirely proper values and lose our drive to engage in activities that would sustain us. Our negativity toward ourselves dampens our motivation and keeps us mired in problems.

Brehm's basic hypothesis is that emotions are motivationally regulating: they impel us toward valued ends and keep us from pursuing unavailable ideals. If we look at emotions that way, then we can see that boredom and loss of interest are mild forms of depressive emotion. These are adaptive, and they may be providing us with valuable information about our values and their realization in the present.

Other times, however, depressive emotions can interfere with performance in trading--and life. In my next post, we'll take a look at how we might identify when depressive feelings are problematic and how we can shift out of those when we need to.


Using Emotion to Change Emotion

A Unique Approach to Emotional Self-Regulation