I’ve recently been reading the book Quiet, by Susan Cain and stumbled upon an interesting chapter that relates to investing.
The book argues that introverts are undervalued in today’s society and Susan Cain provides lots of interesting studies and scientific evidence to back up her theory. If you get the chance, I strongly recommend reading this book which can be bought for no more than a few dollars.
In Chapter Seven, the author talks about the financial crash of 2008 and gives the example of a 60 year-old man called Alan who gambles away 70% of his retirement money betting on General Motors stock. Alan ends up losing as much as $700,000 as he keeps on buying the stock as it lurches lower and lower towards bankruptcy.
According to Cain, one of the reasons why Alan lost so badly was because of his temperament. Cain argues that Alan was highly ‘reward-sensitive’ and therefore took much bigger risks than he should have, in the expectation of winning big.
In other words, instead of considering the real risks involved, all Alan could think of was how he was going to spend all the money that he was about to win. Cain says that reward sensitivity “motivates us to pursue goals like sex and money, social status and influence” and that “reward sensitivity on overdrive gets people into all kinds of trouble.”
I’m sure you can see how this relates to trading. If you approach stock trading with a highly reward sensitive attitude you can miscalculate the real risks involved. Instead of reducing risk when things are going badly, you might end up taking on more risk, the cardinal sin of trading.
Another good example of this type of behaviour was Nick Leeson who famously $1.3 billion and led to the collapse of Barings Bank.
Cain suggests that not only are reward-sensitive individuals hard-wired to take on too much risk but that most highly reward sensitive people are usually extroverts.
As a result, the suggestion is that introverts are more risk-averse and they make better traders.
The science behind all this appears to be that extroverts receive a greater hit of dopamine in the brain when they take on risk and receive reward, whereas introverts tend to receive much less of a buzz.
There’s bound to be more to it but I’m sure you can relate to that feeling of putting on a trade and the buzz that comes with it.
According to this book, the less excitement you get when placing a trade the better. The best traders are professional and emotionless and these are most usually executed by introverts.
But all is not lost for extroverts. If you think you might be an extrovert and are struggling to control your trading decisions consider automating part of your process.
Building a simple investing system can provide an excellent framework that can be used as a solid base for further exploration. Take care of the basics and you’ll achieve greater control and clarity over your entire investing process.
Joe Marwood is an independent trader and the founder of Decoding Markets. He worked as a professional futures trader and has a passion for investing and building mechanical trading strategies.
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