The alternative title for this blog was, ‘Cognitive Flexibility Pays’

Some things never change. When humans are faced with information or data and need to decide what to do with the information, including how to respond to market moves, there are two general ways humans will respond.

Some people will assimilate new information in such a way as to hold onto their prior perceptions and beliefs, fitting the new data into their old model.  Other people will accept the information as more valid and instead of changing the meaning of the new information to fit one’s previous concept of reality, they adjust their model of reality (creating a new belief in the process) to accommodate the information.  Essentially, this is assimilation in the service of psychological denial to maintain the status quo and a rigid perspective versus accommodation of new information in the service of new beliefs and cognitive flexibility.

Here’s the interesting part; and this is what keeps psychologists, like me, in business. The more important the old concept of reality is to someone, the more important it is to his or her self-esteem, sense of inner worth, and/or sense of status in the eyes of others……the more tenaciously they will hold on to their old concept, and will ignore or reject new evidence that conflicts with one’s old but familiar perception or belief.

What I have seen first hand as an active trader myself and a psychologist who works with traders is that this maladaptive behavior is quite pervasive, especially among highly intelligent traders.  This is due, in part, because they can develop and articulate self-persuasive logic to justify the beliefs or conclusions they wish to keep. I say ‘in part’, because there are often other dynamics at work here, including unprocessed emotion, that contribute to cognitive inflexibility.

Differing opinions are good for the market.  The differing views and differing ways that humans assimilate their views is what makes a market. It provides profitable opportunities, often based on different time frames.  One could even say that cognitive inflexibility pays….as long as you are not in the inflexibility camp…… taking the other side of the trade.