Good article from today's Innerworth. Chinook ----------------------- Feature Article Regret: A Powerful Emotion You Must Face When trading the markets, one often faces actual harm: If you bet a lot of capital on a single trade, and it goes against you, you lose it. The harm isn't imagined; the actual loss of money is painful. It hurts, and you may often regret having made the trade. There's a very human instinct to avoid pain at all costs. Not only is the actual loss of money painful, but also the mere feeling of regret from making a bad trade. Regret is so incredibly painful at times that many traders avoid even putting on a trade for fear of having to face the regret of loss later. It's as if the subsequent regret after making a loss is more disturbing to the psyche than the actual loss itself. We feel regret once we realize we have made the wrong decision, such as making a losing trade. And if we put a lot of ego on the line with that decision, the hurt intensifies. For example, if we do an extremely careful analysis, and start to think that the analysis was so good that it validates our talent as a skilled trader, we've put a lot of self-identity on the line with our money. Whether we are conscious of it or not, we tend to think, "I've put a lot of effort into this trade, and I think I'm right. But if I'm wrong, it suggests that I'm not as great of a trader as I had thought." If we were to make a trade on a whim, in contrast, we may still feel the regret of the loss, but it won't hurt as much. We didn't put our ego on the line, so we can easily write off the losing trade psychologically: "It's not my fault that I lost money on that trade. I just made the trade on a whim." Feelings of regret are painful, and some people will do anything to avoid feeling such unpleasant and disturbing emotions. And, at first glance, it often seems as if the easiest way to avoid feelings of regret is to just avoid making decisions. If you don't make decisions, you can't be wrong or feel regret. Although this seems like an obvious solution to avoiding the unpleasant feelings of regret, you may see that if you avoid making trades (or make poorly planned trades on a whim to protect your ego), you cannot pile on profits, which is the ultimate goal of trading. A more practical solution is to learn to face regret head-on. There are a few simple ways to cope with regret. The most important way to cope with regret is to accept the fact that regret is an emotion that you'll be likely to experience as a trader. You're going to make losing trades, and if you don't take proper precautions, you will feel regret. It's not useful to delude yourself into thinking that you can avoid regret completely. That said, you can feel relief in knowing that you can take steps to minimize its powerful influence. For example, you can remind yourself that regret is not nearly as bad as you are making it out to be. Many times, all humans tend to overstate the adverse effects of a dreaded outcome. We tend to think that a losing trade would be awful, terrible, or catastrophic. In fact, if we control our risk on the trade, and plan it out carefully, the risk will be minimized and not catastrophic at all. Under such conditions, one's potential demise is greatly exaggerated. A useful thinking strategy is to remind yourself, "I'm making more out of the potential loss than it deserves; it is not going to be as unpleasant as I'm thinking it will be." Another way to minimize regret is to try to impersonalize the trade. Think in terms of probabilities, "This is just one of many trades. The outcome of this single trade means nothing. The big picture is all that counts." By reminding yourself of the relative insignificance of a single trade, you'll minimize the potential regret should you lose. Similarly, it's also important to remember that a single losing trade (or even a few losing trades) doesn't mean that you have poor trading skills; it may just be a run of bad luck. There's no point in making the outcome of a trade symbolic of your skills as a trader. And, most importantly, never put your self-worth on the line with your money. You're a professional. The outcome of the trade should not influence the positive view you have of yourself as a person. Don't let the tendency to avoid regret influence your trading decisions. Regret can be a powerful emotion. It can be so painful at times that one avoids making decisions, and it may lead to putting on trades on a whim to protect one's ego. But it's not necessary to let the fear of regret influence you. Keep in mind that if you make a losing trade, you may feel a little regret, but you can handle it. Don't try to avoid regret. Face it head-on. You'll feel more free and powerful. Copyright © 2000-2003 Innerworth.com. All rights reserved
IMHO, the article is misusing the word "regret". Regret is the feeling you get when you make (or don't make) a decision due to a momentary lack of courage. Examples: - not asking a girl out. - not taking your stop loss. - not starting your own business. Anger or despair is the feeling when you make a courageous and risky decision that does not work out. Regret is for when you played it safe, took the path of least pain. People who live courageous lifes don't have a lot of regrets. They may not like the outcome of their actions, but they typically have few regrets.
... from my perspective, the attempt to identify and manage the emotion is admirable and useful part. for example, right now I feel a certain hatred - hatred of myself for making what I feel is a stupid trade on Thursday and then acting out that feeling and turning it into a really stupid trade (ie took too much loss). The thing I was talking about in the thread about fear and greed (modern psychoanalysis looks at....) is the process of identifying the emotion such that your consciousness of it PREVENTS you/me/us/whomever from them acting out the emotion in trading decisions. imho. DKS
http://www.maaw.info/ArtSumDeming93.htm Deming, W. E. 1993. The New Economics For Industry, Government & Education. Cambridge: Massachusetts Institute of Technology Center for Advanced Engineering Study. Will best efforts bring improvement? No, Deming argues that best efforts not guided by knowledge will dig us deeper into the pit we are in. What is needed is new knowledge. There is no substitute for knowledge. Knowledge of Variation A knowledge of variation includes knowledge that life is variation, knowledge of the difference between a stable state and an unstable state, knowledge of the difference between common and special causes of variation and knowledge of the effect of the system on the performance of people. It also includes a knowledge of the implications of all this for management. The Theory of Knowledge The theory of knowledge includes an understanding that management in any form is prediction. A statement, if it conveys knowledge, predicts a future outcome including the risk of being wrong. Prediction requires theory. Without theory, experience has no meaning and there is no learning. Copying examples without understanding the underlying theory may lead to disaster. Any number of examples cannot establish a theory. Deming states that "There is no true value of any characteristic, state, or condition that is defined in terms of measurement or observation." "There is no such thing as a fact concerning an empirical observation." An operational definition is needed. He defines this as a procedure agreed upon for translation of a concept into a measurement. But this produces information and information is not knowledge. Knowledge comes only from theory. Psychology A Knowledge of Psychology includes a knowledge that people are different from one another and knowledge of how to use these differences to optimize everybody's abilities and inclinations. It includes the concepts of intrinsic and extrinsic motivation and the phenomenon of over justification. People are born with intrinsic motivation that is often destroyed by various practices at school and work. Grades cause students to work for grades, or a reward from parents for grades, rather than to work for the purpose of learning. Rewards at work such a merit pay cause people to work for rewards rather than for job satisfaction and to find meaning in their work and lives. Some extrinsic motivation helps develop an individual's self-esteem, but over emphasis on extrinsic motivation eventually destroys an individual's intrinsic motivation and leads to detrimental effects on self esteem. Work and life eventually have no meaning. Why was Deming critical of the zero defect philosophy? Deming was critical of the zero defect philosophy because it is associated with the idea of meeting specifications as opposed to continual reduction in variation and improvement in the mean outcome through improvement of the process or system.
So if you want zero defect in your trades whereas the system's tolerance (you + the trading framework + market's reaction) doesn't allow to do so you will get the opposite results as wanted (both on psychological and financial point of view) due to the "Taguchi" loss function (Taguchi is another Industry Quality guru like Deming and Shewart) that increases all the more so (at ^2) that your system deviates from the ideal specification: <IMG SRC=http://www.maaw.info/ArtSum5.gif> Conclusion: the more you (only) Want, the less you Get. The more you Know (and Practice and Check or so called Deming's wheel see picture below) , the more you Get: <IMG SRC=http://www.maaw.info/ArtSum7.gif>