Trading and Human Nature

In the realm of finance, trading is an activity that often puts human nature to the test. Trading is not just about numbers and charts; it delves deep into the complex web of human emotions, behaviors, and decision-making.

Huge Disparity in Power between Market and Traders

Compared with traders, the market has unlimited capital and time, while traders’ capital, time, energy and luck are all limited. Therefore, the power contrast between traders and the market is huge. Traders can only gain certain advantages over the market locally, temporarily and at a certain level.

Most of the time, the market is nonlinear, irregular and even not suitable for trading. However, those non-senior traders are trading most of the time. Just like Don Quixote, they rush towards the windmill again and again, and finally return in vain or even be covered in bruises.

Traders cannot succeed at one time, but they can fail at one time.

Weaknesses of Human Nature

Some universal weaknesses of human nature will increase the possibility of failure when reflected in trading. For example, greed, fear, being overly concerned with gains and losses, self-protection, short-sightedness, laziness, impulsiveness, following the crowd, and superstition of authority…

Laziness

Graham (the founder of CFA and Buffett’s teacher) had an investor he highly respected named Baruch. He called Baruch a great man. Before the great bear market in 1929, Baruch withdrew from the stock market early, while Graham did not withdraw and almost lost everything until he made up all his losses in December 1935, seven years later.

In his book, Baruch put forward ten investment principles. One of them is that “before buying a certain security, one must find out everything that can be found out about the company of this security, company management, company competitors, as well as the company’s profitability and future development prospects.”

Laziness leads us to not conduct in-depth and rational investigations and studies on the target before buying it. We don’t even look at the publicly disclosed operating and financial information at all. When we order a takeaway worth dozens of yuan, we still look at it again and again, compare prices from different sellers, and try hard to match and combine orders to maximize the use of coupons. However, when making decisions to buy stocks worth tens of thousands or hundreds of thousands of yuan, it only takes a second.

Laziness also leads us to never learn relevant knowledge. In the information age, most investment concepts and knowledge can be found on the Internet. However, when many people are actually investing, they are completely driven by passion. They just blindly follow a six-digit code told by a stranger who may even have no investment experience at all.

Conformity Behavior

Humans are social animals, but trading often requires independent and solitary thinking. Conformity behavior may be a choice rooted in human genes. In ancient times, once abandoned by a tribal group, an individual was unable to withstand the harsh external living environment. People will tend to give up the information they possess and cater to others, even if rationally analyzing they should take a completely different behavior.

The root of conformity behavior, as explained by behavioral finance, is regret-aversion bias. That is, when people make wrong decisions, they will have regret emotions, and if the failure is caused by the new decisions they put forward, the regret emotions will be stronger. Similarly, it may also lead to superstition of authority. When investors think that they are following the mainstream or authoritative opinions, they will think that even if it fails, it is not their fault, so they blindly follow the trend.

Especially when the market heats up in a bull market, people are more inclined to conformity behavior. When the people around have made money by investing in the market and one has not participated, one will feel particularly anxious. In fact, the more frenzied the market is, the more valuable it is to maintain rationality. I once said, “Constantly cultivate one’s ability to think independently, constantly overcome one’s own emotional biases. A bull market is rare. I hope that what a bull market takes away is money, not adrenaline and lessons.”

Greed and Fear

Due to the herd effect, when the market is overheated or too cold, there will be excessive phenomena. The operation that ordinary people dream of should be not participating or participating less in the “bear market”, or conducting long-term and phased position building for the targets that are wrongly sold to below the reasonable range in the market, and cashing out and leaving the market in the “bull market” bubble. However, in actual operations, many people enter the market in the group madness at the top of the “bull market” and then stand guard at a high position for several years. At the most pessimistic moment at the end of the “bear market”, few people dare to enter the market against the trend and achieve “be greedy when others are fearful”.

Qualified Trader Should be Continuously Self-disciplined and Constantly Learning.

Qualified traders play a crucial role in the complex world of finance. To be truly qualified, they must possess an unwavering sense of self-discipline. This means adhering to strict trading plans, controlling emotions in the face of market fluctuations, and resisting impulsive decisions. At the same time, continuous learning is essential. Markets are dynamic and ever-changing, and traders need to stay updated on new strategies, economic trends, and technological advancements to make informed decisions. Only through a combination of self-discipline and learning can traders hope to succeed in this challenging field.

Reproduction Notes：InvestFancy » Trading and Human Nature