Last week we discussed confidence and overconfidence, in this week’s article we will look at the types of chemicals that are released during trading process and the impact it has on us.
So, what type of chemicals are released during trading and how does it affect us?
A professor of psychology and neuroscience at Stanford University had an interesting breakthrough with regards to trading and the chemicals released during trading. Brian Knutson discovered that trading has the means to tweak the part of the brain that is normally affected by sexual desire and drug abuse – the amygdala (also known as the “pleasure centre”) This is the part of the brain where the neural network is located. This part of the brain sparks up with anticipation of reward and dulls the frontal cortex (where rational executive thinking takes place).
This means that underlying our trading decisions there is a bunch of chemical reactions that take place and we are not even aware of them.
Traders should act rationally, and the frontal cortex is the driver’s seat of the decision-making process. Once they have made a profit or a loss (profit and loss is registered in the brain as pleasure or pain) then the decision making has become awash with the chemicals released from the emotional tension.
In the beginning traders make rational decisions, but when an unexpected profit or loss happens, the pleasure and pain centres surpass the dominating frontal cortex – this leads to traders making more irrational decisions.
So, what does this exactly mean?
This means that a loss would trigger risk-averse behaviour, which means that you become overly cautious in your decision making. A profit would trigger a risk-seeking behaviour and you become excessively reckless or overconfident.
Brain chemistry partially explains why we take a loss to heart or let the losses run, why we don’t just take a small loss rather than taking a bigger loss or, sit on a trade for too long or miss the opportunity to take profit. When your brains chemistry is flooded with adrenaline, cortisol, or serotonin (the by-products of emotions) you’re just not going to trade as well as you would have if you had stayed in a neutral state of mind.
– Ryan Mowatt, The Performance Coach