Chapter 2 Real trader psychology: our desire for short cuts

In this chapter …

I show some techniques that I believe help to overcome some biases and heuristics. I outline some of the heuristics that have been uncovered so that you can learn more about our flaws and weaknesses. We need to understand these and try to overcome them if we are to build a sustainable trading career.

If you were to ask the average financial junk-food commentator about the psychology that drives market participants, you will usually hear the words ‘greed and fear’; markets, we are told, are driven by greed and fear. While this is true to a degree, maybe more at market extremes, there is a lot more to the psychology of traders and investors than simply greed and fear.

In recent times the field of behavioural finance has exploded with a range of research and knowledge of how we make decisions, and all traders need to understand these concepts. In particular, a range of biases and heuristics have been shown to affect (or afflict) decision makers. It is therefore vital that we learn more about them and try to find ways to overcome as many as possible.

Daniel Kahneman, Nobel laureate and one of the leading figures in behavioural psychology, is pessimistic as to whether we have the ability to control our heuristics. I must say that in general I tend to agree; however, in the next section of the book I will show how to overcome some of them.

Whether or not most people can consistently employ these techniques ...

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