Ego: Illusionist, Trader’s Nemesis

There is no doubt that a primary driver of capital markets, for better or worse, is the human ego.  Depending upon which definition of ego you subscribe to (Freud did not invent the term), for purposes of this post, the essence of ego is primarily unconscious and self-serving.

Ego is not inherently good or bad but may be best considered as having great potential to be destructive; therefore the investment trader is wise to be aware of what ego wants and how it can be harmful.

Illusions commend themselves to us because they save us pain and allow us to enjoy pleasure instead.  We must therefore accept it without complaint when they sometimes collide with a bit of reality against which they are dashed to pieces. ~ Sigmund Freud

The ego is an illusionist.  If you, as both observer and the observed, are aware of ego’s illusion, however, the illusion ceases to exist.  In other words, ego and self-awareness cannot co-exist.

Awareness of ego (self-awareness) begins with understanding some of the things and some of the results that ego wants:

• Ego wants to be heard: It is the inner voice that chatters endlessly in your mind.
• Ego wants to be “right:” It wants you to believe that your successes are self-created and that failures are anomalies:  “I can predict financial market movements.”  “I was right before, I will be right again.”  “This mistake is a fluke.” “What the market (the herd) is saying is wrong.”
• Ego wants to thrive and survive: It consumes messages that give it energy; it looks for information that confirms its biases (i.e. If the bias is toward falling stock prices, ego wants information supporting falling stock prices and economic recession; and ego ignores information supporting rising stock prices and economic growth).
• Ego wants to compete: It wants to win and for others to lose; it wants to make more money than your neighbor; it wants to be right; and it wants to prove others wrong.
• Ego rationalizes: Losses are perceived as temporary setbacks; successes are affirmations of “I am right.”

Awareness minimizes the negative effects of ego; awareness dissolves the illusion that ego presents.  The ego, however, is a natural function of human survival; therefore, it is not healthy to fight or deny the ego; and it is not necessary to be a PhD in psychology to counter it; simply be aware of it.

For the investment trader, there is only control over the individual trader’s actions (not the market’s), and more importantly, the observation and reflection of those actions for improvement and future application.

If you’re fighting a trend, you’re defending your view. And that means you’re ignoring the market. When the ego is out of the way, the view doesn’t matter: you’re free to sit back, read the market, and follow its signals. Conversations, with markets and people, go much better if you maintain an open mind and simply listen. ~ Dr. Brett Steenbarger

As an investment trader, observe yourself; think about your thinking by asking questions:

Are you listening to ego or are you listening to the market?

Are you placing this investment trade to prove yourself right, to prove others wrong?

If the truth needs no defense, then why are you defensive?

Are you comfortable saying “I don’t know?”

Do you find yourself reading only information and media sources that confirm your biases or do you read opinions of every variety, even those that disagree with your biases?

Are you trying to “beat” something (e.g. S&P 500 Index) or do you have a personal, concrete investment objective?

Do you rationalize decisions, not willing to admit mistakes?

Is your life a tool for money, or is your money a tool for life?

What personal practices do you apply to minimize the potential harm of ego?  Does self-awareness matter or does it add to “analysis paralysis?”  What do you think?  Or should I say, what do you think about thinking?

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Kent Thune is blog author of The Financial Philosopher.