6.3.4 Emotions and investment decisions

I'm going to start also talking about traders. That seems quite a way away from the world of consumer finance, which we are mostly concerned with, here, but at the level of the role of emotions in financial decision making, it seems to me there's a great deal in common between what goes wrong with processes of decision making for finance professionals and for everyday members of the public. I'll talk, a little bit later, about some of the things that come out of consumer research. Here, for example, is a trader talking about his trading.

I'm a trader. I do follow my emotions but I tend to suppress the positive ones and follow, a little more, the negative ones. In particular, fear is an emotion I recognise and tend to follow. At the peak of the crisis in 2008, there was a lot of fear in the market. I had a lot of fear about the market, and I could relate this fear with the liquidity in the market. The fear I had was that all these markets were going to disappear, and that I needed to turn around. Most of my decisions, at that time, were driven by that particular emotion.

Here's a trader talking about the way in which emotion plays into his decision making. When I actually started studying traders back in the mid-1990s, we weren't studying emotion, at all, we were studying risk taking. The thing that struck us was just how much these guys talked about their emotional life and the role that emotions played in their decision making. Here's a trader manager. She's got 25 years of trading experience.

I do think traders get better at not letting their emotions affect their actual trading. Experience will help them realise that, usually at least what comes up must come down, whereas, an unexperienced trader has no sense of 'where is this going to stop?' and the panic just rolls and they simply lose overview, whereas, if you've been in the situation, many times, then you draw on that experience and recognition in terms of calming your emotions to a degree where they affect your trading, the least.

She makes the point that traders get better at this, over time, and that's one of the things that came out of our research, is the increased capacity to effectively regulate their emotions that traders had. Be careful how you understand what I mean by emotional regulation. That does not mean not having emotions; it means handling them, better. People who suppress their emotions, typically, are much more in the grip of them.

Here's how some of the low performing traders, we interviewed, talked about how they handle their emotions. This first person was very much a typical novice trader, in the way in which he talked about how he handled his emotions. "I'm a bit of a cold fish, I don't think emotions greatly affect my decision making. If you're making money, you're achieving your objective." After about half an hour, when he had warmed up, he started talking about it in different terms. "It can be horrendous, with violent mood swings. You don't know what to do, when you lose money." A real sense of finding it difficult to manage those emotions. Later on, he went on to talk about throwing up in the toilet, in terror, when things were going badly wrong, in the market. Someone else said, "I think there is a strong emotional element.." This person was talking about doing everything they can consciously to overrule that, and typically, these people talked about managing their emotions by either by trying not to have any, or to just get out of the situation.

High performers talked about emotions in a very different kind of way. The different kind of way in which the high performers typically talked their emotions. First of all they were often much more articulate about their emotions. Secondly they often talked about how they managed their emotions in terms of re-framing situations, by saying, "this is one trade, and I'm setting it in the context of what has happened, this year, or, in the course of my career". So a very different approach to how they manage their emotions, but a lot of the more experienced traders really talking about the importance of discipline, about the importance of, that ability to be really honest, with yourself, and not tell yourself the comforting lies. Anyone, like me, who has tried to diet, probably has experience of the comforting lies that we, very easily, tell ourselves. There are no calories in broken biscuits is a favorite one of mine!