Trading is all about Decision Making. Decision making involves analyzing the possible outcome of various available decision options and taking the appropriate action. Decision making in an uncertain and probabilistic situation faces many challenges. Most of them are discipline related and psychological.
If you search the web, there is no shortage of articles on trading psychology. But I feel most of the trading psychology writings revolves around Expected Utility Theory. This theory assumes decision making takes place by calculating the expected utilities of all the possible options and choosing the option with the highest expected utility.
Trading psychologists advise us to be disciplined and advocate controlling and ignoring the emotions. They ignore the role of emotions in decision making and advise us to aim for an idealized rational approach. In my humble opinion this is not at all practical in an uncertain environment like trading. Further the probabilistic nature of the market makes it much more difficult to practice.
I find Antonio Damasio’s Somatic Marker Hypothesis (SMH) much more relevant to trading than the conventional stuff. SMH gives a central role to emotions in decision making. Somatic Markers trigger automatic reactions to situations in human beings. Whenever a decision is to be made each option induces a somatic response which is experienced as a feeling or emotion and these responses will depend on the past experience. These somatic responses will almost always over ride. The more you resist, the more it will dominate.
The theory consists of two ideas.1.Somatic Markers affect decisions and 2. Somatic Markers depends on past experience. If we want to get rid of
emotions emotion related issues from our trading decisions we must have enough experience to
develop right Somatic Markers to support the ideal action.
I think ultimately our edge will determine our trading success. If we are trading a method with an edge and doing well, slowly we will develop ideal Somatic Markers. Instead of contradicting and over riding the ideal decision, these SM will start producing what we call “Intuition” or “Gut feeling”. This will help the decision process in an automatic manner and our discipline and psychological issues will disappear for ever.