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Wednesday, 30 January 2013

Our Brains were not designed for Trading.



It has long been a contention of mine, that one of the problems traders face is the incompatibility between how they (we) would like to believe their brains and minds work, and how they actually do work. - The human brain has evolved over many millions of years, going back to when our ancestors walked the open savannah, lived in caves, and existed in a range of challenging natural environment. Including when they existed in various different forms such as; apes, monkeys, and the various species which pre-dated them. - The modern human brain is of course slightly but significantly different; it has evolved a highly developed frontal cortex, which enables us to think, abstract, reason and rationalise, something which, we believe, enables us to ascend above all other creatures, and has allowed us to create the world we live in. Nonetheless, our default operating system, and in particular our response to threats and opportunity, rely very much on our ancestral inheritance. This is why we will often do the things we do, which we then question a little later in a moment of reflection as to 'Why the hell did I do that', or words to that effect. It is also why we are able to hit the brakes on the car in that split second when the car in front brakes sharply, even though the brain has not yet actually registered that the car in front has braked. - Yep! We are not as in control on a conscious level as we like to think we are.

The excellent ‘Big Picture’ blog has this morning posted an excellent article called ‘This is your brain on behavioural economics’. However, previous to that it also posted an excellent series of slides entitled ‘This is your Brain; this is your Brain on Equities’. They are well worth looking at to gain a greater understanding of some of the aspects that our brain does well, and not so well, and the challenges and hurdles we face in trying to be successful in the financial markets. 

Links:
This is your brain on equities:
This is your brain on behavioural economics.

 

'Human Brain' Image courtesy of dream designs at FreeDigitalPhotos.net


 


 

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