It’s well known to anyone who has been betting or trading for any length of time, that our emotions can sometimes get the best of our better judgement. In this article we take a close look at how our emotions can lead us to making poor decisions, and diminish our betting returns.
Blink: The Power Of Thinking Without Thinking
Anyone who has bet with a bookmaker or traded on betting exchanges will be aware that the activity of trading triggers several emotions. From the initial rush of excitement as the value opportunity is identified, to elation or despair depending on how the bet plays out, and emotions may well continue long after closing out, whether it was with a profit or a loss, as second-guessing yourself is an integral component of trading.
While we are always subconsciously aware of these emotions, in the excited state that our brains are in, it’s not always the case that we consciously recognise them, and pay attention to them. This is important, because research clearly shows that strong emotional management improves performance and decision-making, and trading is very much about making the right decisions under pressure.
Emotional Management is handled by a part of the brain called the amygdala. It acts as a memory chip. All our emotions – positive and negative – are embedded here, and this information is used as a sensor, comparing historical experiences with the current situation we are facing. It is this referencing of the past to the present that shapes our behaviour and decision making.
Blink: The Power Of Thinking Without Thinking
You will often read about the importance of studying markets and the theory that it takes 10,000 hours of practice to master a skill. The number 10,000 has a nice ring to it, and it may well be appropriate for physical activities, but 10,000 hours is a long time. Putting in 8 hours a day, 7 days a week and you are still looking at a time-span in excess of three years!
The point is that it is necessary to put in a lot of time to understand how markets move, and since the markets are constantly changing, and no two of us learn at exactly the same speed, the number of hours is a moot point.
Our thoughts, feelings and actions are shaped and strengthened by our experiences. Neural connections that are used become strengthened, while those unused become weakened. A bettor and in particular, a trader needs the ability to identify value, and often speed is of the essence. The process of watching hundreds of events and the corresponding movements in the market is essential to understanding how to trade that market. After a certain number of events, you instinctively (subconsciously) recognise when a price is wrong, i.e. where there is value. It’s the phenomenon written about in Blink: The Power of Thinking Without Thinking – a 2005 book by Malcolm Gladwell.
Because of the way the brain developed, emotion comes before thought. Every thought or stimuli we experience is first scanned by the amygdala for emotional impact before we consciously act on it or think about it. We feel before we think, and this is why emotions hold such power over our lives.
To relate this back to betting and trading, we can probably all relate to what happens when a trade or bet goes wrong. Our heart rate and blood pressure increase. Breathing gets heavy, and we tense up. It’s the famous ‘fight or flight’ response as our primitive brain identifies that we are in trouble. Fortunately for us, a bad trade does not mean that our lives are in danger – unless we are betting with someone else’s money perhaps – but nevertheless, we feel threatened.
This reaction is known as an Amygdala Hijack, which basically means the thinking part of the brain (the neo-cortex) is bypassed and we act on instinct. The neo-cortex can usually process four streams of thought at any one time, but when the hijack kicks-in, our working memory (thinking) gets compromised, and we struggle to process one stream of thought. In other words, we can’t think straight, and this is why an amygdala hijack is so damaging. The release of cortisol, a substance toxic to brain cells, isn’t good either.
So what can be done to avoid, or at least reduce, the potential negative impact of a trade that moves against us?
The acronym suggested is S-O-S-S. It’s a little contrived, but the four steps are:
Simply means stop – don’t react immediately. When stressed, we make decisions based on less than 5% of the available information, which is clearly not enough. We need to make ourselves consciously aware of the hijack, and regain control of our brain.
Fairly self-explanatory. Take a deep breath – its advice that is frequently given for a reason. Consciously breathing distracts us from the racing mind.
A little obscure, but from a trading perspective it really means take a moment to accept the situation. We prefer ‘perspective’ really, and for me, once you place the potential loss in perspective, it all seems far less serious than your brain thinks it is. No one is dying or being rushed to hospital.
The final step, and it’s where you increase that 5% of available information and reach a decision based on logic and reason rather than an emotion-driven one.
One of the many lessons we have learned from trading is the importance of staking ‘sensibly’. As we have discussed, ‘sensibly’ can be hard to determine, but it is essentially staking at or below a level where a bad-break doesn’t trigger an amygdala hijack. Trades will go wrong. However much of an edge you have, the laws of probability dictate that you will lose from time to time. If a trade goes bad and triggers a hijack, consider reducing your stakes because it is very difficult once hijacked, to regain control and make a smart decision, although hopefully the information you have just read will help.
Stake sensibly, maintain perspective, keep calm and carry on.
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