Trading psychology frequently emphasizes the necessity of “removing” emotions from decision-making to achieve more consistent trading outcomes. But is it truly feasible to eliminate emotions from our decision processes? According to researchers Hans-Rüdiger Pfister and Gisela Böhm from the University of Bergen, emotions are not merely disruptive elements; they are integral to the decision-making process.
In fact, they argue that making decisions without emotional involvement is not only suboptimal but perhaps even impossible. Emotions play four critical roles in decision-making:
1. Forming Preferences
Every decision is based on information, and a trader’s emotional state regarding potential outcomes significantly shapes their preferences. For example, when faced with the choice between investing in Bitcoin or the U.S. dollar, a trader weighs the potential joy of substantial returns against the fear of missing out (FOMO) and the risks of trading a volatile asset. Similarly, when contemplating whether to close a profitable trade, the trader balances the desire to maximize gains against the discomfort of potentially giving back profits if the market reverses. The correctness of the emotions assigned to these outcomes is less important than the fact that they provide evaluative information that assists in decision-making.
2. Accelerating Information Processing
Emotions have historically been crucial in making rapid decisions, from our ancestors fleeing predators to modern consumers impulsively clicking “add to cart” during flash sales. While not all quick decision-making is driven by emotions (consider the strategic thought involved in Tetris), emotions can enhance the speed of information processing. For instance, if a trader named Harry feels anxious about a weakening bullish trend as an asset approaches a significant resistance level, his emotional state may lead him to take profits more quickly when he sees resistance holding.
3. Determining Relevance
Decision-makers assess various factors based on what they perceive as relevant to their situation, often guided by their emotions. A trader who feels elated after a successful SMA crossover trade may focus more on moving averages in future trades, while a trader who regrets missing a long-term trend might pay closer attention to multiple time frames in their analysis. Regardless of whether the trader accurately identifies relevant factors, the emotions associated with specific aspects significantly influence their decision-making process.
4. Reinforcing Commitment
Making decisions also requires the ability to stay committed, even when faced with conflicting motivations. Confidence in a trading plan can empower a trader to cut losses, despite the anxiety of closing a losing trade. Similarly, feelings of shame from previous losses can encourage traders to adhere to sensible position sizes, even when greed tempts them to take excessive risks.
These examples demonstrate that emotions are a fundamental part of decision-making, making it impossible to simply “remove” or “avoid” them. Rather than viewing emotions as harmful, traders should recognize that emotions like fear can prompt timely loss-cutting, while anticipation of success can reinforce adherence to a trading plan.
Conclusion
The goal for traders is not to eliminate emotions but to develop appropriate emotional responses that align with their preferences and lead to profitable trading decisions. Understanding and managing emotions can enhance decision-making and ultimately improve trading performance.
