I came into trading back in 1995 after having worked for a few years as a psychological consultant for the U.S. Dept. of Defense and the Navy. That work involved a lot of crisis management, threat assessment, trauma work, and crisis management. In 1995 when I began doing consulting work for a major bank, I quickly realized the connection between the psychology of financial risk taking and trauma and crisis management. (There are two main types of trauma, chronic and acute. Traders may experience both, to varying degrees.)
Research in neuroscience supports this by showing a connection with the amygdala (area of the brain involved in emotional reactions) and PTSD symptoms and loss aversion. Article on amygdala and loss aversion here http://www.sciencedaily.com/releases/2010/02/100208154645.htm and article on amygdala on PTSD here http://ajp.psychiatryonline.org/cgi/content/full/162/10/1961
As you can see, the amygdala is associated with both the fear of losing money and the experience of trauma. The fact that fear of losing money and trauma are connected may seem obvious to some readers, but the implications are significant. It’s more than just a psychological connection, the biology makes it quite significant. I think this might, in part, explain why many self- help approaches to trading psychology don’t always work. My blog piece on the difficulty of altering beliefs due to the emotional component plays right into this. https://andrewmenaker.com/altering-beliefs-is-not-so-easy/
I will be writing more on this topic of trading and trauma.
[…] is experiencing chaos will not be able to focus or perform as well as an enemy that may be in pain. Pain may not be conducive to making a rational decision that is one’s best interest, but chaos has an even greater negative impact on the ability to focus […]
[…] relationship between the degree of stress and the brain’s capacity to process incoming data. The more stress one experiences, the brain’s ability to process incoming data decreases. These relationships have been well researched and are well accepted in the world of neuropsychology […]
[…] Risk management includes money management and position sizing. Consider for a moment what using excessive leverage and exposing your account to significant losses does to us. Besides the financial loss, it elicits a neuro-biological and psychological response (fight, flight, fright, or freeze) that makes it very difficult to do the right thing to mitigate damage and get back on track. (See here for an article on the brain’s response to financial loss). […]