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Trading quirk! Why does the brain hinder your trading

2024-04-19

Do you know a lot of trading theories but still can't make a profit? Perhaps it's because we don't understand ourselves well enough. Our brains often drive us to do things that make sense emotionally but are illogical in trading. When you're making decisions about money, your brain might be in its best or worst state. That also means the decisions are not correct, but they also reflect human nature the most.

Good news brings bad results

"Buy on the rumor, sell on the news" is one of the oldest sayings on Wall Street. It tells us that when smart investors generally believe that something big is about to happen, the stock market will rise. Once the public knows the news, these people will sell at a high price, and the stock price will fall.

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Those smart investors don't have extraordinary brains, but the phenomenon is actually related to the expectation circuit in everyone's brain. Celera Genomics Group is a vivid example. The company's stock price soared because of hope, but fell because of reality.

In September 1999, Celera began sequencing the human genome, and a series of news revealed that the company might achieve one of the biggest leaps in the history of biotechnology. By December, investors full of expectations raised Celera's stock price from $17.41 at the start of the sequencing project to a high of $244 at the beginning of 2000.

In June 2000, Celera held a grand press conference at the White House, claiming that their company had cracked the human genetic code. With the news released, the company's stock plummeted by 10.2%, and fell another 12.7% the next day. Who would have thought that a scientific miracle would lead to a stock market crash?

In fact, as soon as the long-awaited good news came out, investors' excitement disappeared. Once investors have nothing to look forward to, they will withdraw, and the stock will crash. You should know that if a company's biggest asset is investors' greed, then buying its stock will bring great danger.

Expected returns can strengthen memory

Researchers in Germany conducted an experiment to test whether the expectation of economic returns could improve memory. Neuroscientists used magnetic resonance imaging scanners to scan people's brains while showing them pictures of various objects. Some of the pictures were paired with the opportunity to win 1 euro, while the rest had no reward.Participants, after learning which images could make money, would have their anticipation circuits strongly activated when these images appeared. Subsequently, researchers showed participants a larger set of images, including some that had not been displayed in the scanner before.

The results showed that they could very accurately distinguish the images they had seen in the previous experiment, and they could also well identify which images had economic benefits and which did not. Three weeks later, they saw these images again. Despite having passed 21 days, they were still able to more easily distinguish the images that could benefit and those that could not.

Compared with the scanning results a few weeks earlier, researchers found that the potential rewarding images not only activated more strongly in the anticipation circuit but also in the hippocampus area of the brain responsible for long-term memory. That is to say, the initial expectation somehow imprinted the memory of potential rewards more deeply into the brain.

This proves that for the formation of memory, expected rewards are more important than receiving rewards. Expectation is the fixative of memory, which will not let the memory of your rewards fade over time. And for some people, the memory of that good feeling may squeeze out various more important financial information.

For example, many people will only focus on the highlights of profits in transactions, but they are easy to ignore the mistakes and losses. Because the expectation of gains can help us remember our gains, even if the success rate is only 20% of the investment can also bring us a good feeling.

Be Alert to High Expected Return Rates

To let the brain's anticipation circuit avoid financial difficulties, the first thing to do is to be aware that the anticipation circuit, as a way of working of the brain, will also get out of control if the rest of the brain does not balance it. In the long run, to avoid the risks and losses caused by the out-of-control expectations, investors can adjust from the following five points:

1. Understand that everything is uncertain. The human search system is stimulated by the feeling of getting rich, which will hinder you from calculating the probability of getting rich. Therefore, the higher the expected return rate of an investment, the more you should be alert.

2. The second time lucky is likely to be a trap. Once you encounter a stock that reminds you of a stock that made money a long time ago, you should be careful! Because their similarities may be purely coincidental. Only after carefully studying the basic business behind a stock can you invest a large sum of money to buy it, otherwise do not make a decision easily.3. Limit potential losses with a fixed amount of capital. To prevent yourself from taking risks in the market, first limit the level of risk to your capital. You can trade with only a fixed portion of the money and keep the rest safely stored away. At the same time, set a cap for speculative transactions. Invest at least 90% of your funds in low-cost, diversified index funds that cover all categories of stocks in the market. And no matter whether the market goes up or down, never touch the funds that have been safely stored.

4. Resist the temptation of cues. The stock market will continuously send out signals to entice you to enter. To improve your self-control, you can start by cleaning up your environment. For example, turn off the financial channels on TV, do not peek at the stock quotes on the electronic display of the stock brokerage firm through the window, and do not check stock prices online.

5. Think twice before you act. In terms of trading and investment, recognize that the total amount of risk and return is far more likely to drive your behavior than the small probability of gaining returns. Therefore, do not make financial decisions under the stimulation of the prospect of huge returns. When you are confused by expected returns, you should find something to distract yourself and calm down before thinking again.