I have a very strong work ethic. As such, I struggle to respect money found or gifted as much as much money earned and so I suffer from a common psychological flaw that affects most people and especially traders, Mental Accounting.
A comment made by @AlphaBetaBanjo, on one of my recent posts, has led me to the subject of this post. Thank you @AlphaBeta for writing,
” ……..It has always been about the emotion. Disrespect the value of a Dollar gained or lost, learn to respect the time you commit to your trade and slowly you will find emotion will leave your conundrum. I am in this trade because yada yada I will be out of this trade regardless of outcome in ( fill in the blank). I treasure my Grandfathers watch…….he sold it to me on his death bed.”
I would say it a bit differently than @Alpha. My personality requires me to remind myself to “respect” the value of the dollar no matter how it is gained in order to avoid going mental, but the result is the same.
We all have unique ways of viewing the world and so we all have unique rules we must set for ourselves. Disrespecting the value of the dollar vs. time commitment in trade planning is @AlphaBeta’s rule that keeps his emotions checked. My first rule is to be accountable and thereby transparent by sharing all my trades. This keeps me from making emotional trades and taking only ones that I have thought out and am willing to admit. It’s not such a different rule really, it’s just a different viewpoint. It forces me to think out my trades and stick to my thesis and only take those trades that are logical to me. But taking his words more specifically, I am reminded that we are complicated beings and as such, no one rule likely covers the entire gamut of what we need to honor in order to keep our spectrum of emotions in check.
As I cogitate upon the mistakes that I have made in recent months, I must acknowledge the highs that my account reflected only a month ago. As soon as I saw those highs, I went mental, or at least my accounting did.
“Mental Accounting” can destroy a trader’s profits. We tend to view money made quickly as money not earned and it can really screw up our ability to defend it. How many of us find a $20 bill in last winter’s jacket pocket and think, “beer money”…instead of say, putting it toward the ever increasing cost of a tank of gas?
Over the weekend, TheHusband (sic) and I watched HBO’s original film Too Big To Fail that reenacted the events leading to TARP (the Toxic Asset Relief Program). Thehusband is a securities analyst …always talking of market manipulation and conspiracy theories; he spouted one that came to him while watching this movie. He rattled on about this and that, eventually arriving at the conclusion of his conspiracy theory. My more simple view is that it was a form of “Mental Accounting.” Those big brains could only think about what money they could make now, right now, without considering the consequences. How else could someone dream up CDO’s?
My account highs last month were made by taking risks that I would not normally take while following “TheBill” but I lost that money taking the same risks, perhaps even larger risks. Consciously or sub-consciously, I let all those gains disappear partially because I didn’t have as much respect for them as the gains I make when I am following my rules and trading more thoughtfully.
But sometimes quick gains can happen even when we are following our rules. In certain markets, it can be easy to have a few trades that work early in the day and this too can lead to taking bigger risks or larger than normal position sizes because we think that we are playing with “house” money. We are as a gambler who gambles away his winnings instead of walking away, simply because they are winnings. We think of it as money we can afford to lose instead of money that can pay down our mortgage.
In my effort to improve my trading skills, and since I need accountability, I hereby announce publicly my effort to avoid mental accounting. It is not that difficult, all I have to do is follow my rules…only take trades I have thought out, be accountable and always stick to my position sizing. And again I say, wish me luck.
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NIce post @the queen
Itry to think of my capital in terms of meals to avoid this issue. Hope to graduate to thinking in ribeye and bentleys somewhere down the line.
@Idiot – LOL
Sometimes it just doesn’t pay to try to “force it”. Unfortunately, often is difficult to know when you are actually trying too hard.
@yogi – indeed. Thanks.