What do Marshmallows have to do with Success at Trading and Investing?

Marshmallows: A a light, soft, spongy sweet which typically comes in various pastel colours and shades.
Trading: The act of buying, selling and exchanging commodities and financial instruments, hopefully for a profit.
Not much in common there then!
However, when it comes to success in the latter, there is a rather tenuous link with the former, which might be useful to remember.

Let me explain!

In the late 1960s, an experiment was held at a Nursery School on the campus of Stanford University. The experiment was to become one of the most well known in the field of Psychology, and was to spawn many more experiments of a similar nature.

Marshmallows, Self-Control and Delayed Gratification.

In the experiment children aged from four to six years were led into a small room, where a treat of their choice, usually a marshmallow, was placed on a table. A researcher then told them that they were going to leave the room and that they had two choices with regard to the marshmallow:

They could either eat the marshmallow in front of them right away.
Or
They could wait for the researcher to return (typically some 15 minutes later) before eating the marshmallow. However if they could do that, they would then be rewarded with a second marshmallow.

The researchers observed the children as they somehow tried to avoid eating the marshmallow. Some

would cover their eyes with their hands or turn around so that they could not see the marshmallow, others started kicking the desk, or playing with their hair, whilst others tried stroking the marshmallow as if it were a small animal. However most could not wait, they simply ate the marshmallow as soon as the researcher left. 

[A YouTube video showing highlights of a reproduction of the original experiment can be seen at the end of this article.]

Of the 653 children who went through the original experiment, around seventy percent were unable to resist temptation and never received a second marshmallow. However, the other 30% were able to find a way to resist. What is really interesting however is that the benefits to those who resisted proved to be far more significant and long-lasting than just a second marshmallow!!

Around a decade later, the lead researcher in the experiment, Walter Mischel, decided to follow up on the progress of the 653 children. What he found stunned the world, of the children who were unable to wait for the second marshmallow, or more to the point were unable to delay gratification, most had suffered behavioural problems of some sort. This included poor ability to focus, they struggled emotionally, they had trouble dealing with stressful situations, and they also had problems maintaining relationships. However, the children who had been able to delay gratification were far more settled on all these issues. And when it came to academic performance, the only truly objective data, their average S.A.T scores were around 210 points higher than the children who could not delay gratification. (That’s significant considering average S.A.T scores are 1500).

But Mischel did not stop there, a further 15 years later he again checked up on the progress of the original participants, now in their thirties. Again, those who hadn't been able to wait for the second marshmallow, reported being unhappy with their lives. Some had problems holding down a job or regularly changed jobs, many had significant financial stress, often they reported trouble dealing with their emotions and many struggled to achieve their goals. Also a high proportion had challenges maintaining relationships, many had problems with obesity, and some reported issues with drug addiction. Once again, the children who been able to exercise the self-control to then earn a second   marshmallow, were in a far better place. By comparison, they reported more fulfilling lives, their finances were either strong or under control, and they had satisfying careers and great long-lasting relationships. Furthermore, on average, they earned higher incomes, and had a far lower likelihood of having committed crime or suffering addiction problems.

Trading, Self-Control and Success.

Now back to trading, I had a career of nearly 25 years me as a trader, before becoming a coach who works with traders and fund managers helping to improve performance. I have also been running an active group on LinkedIn for a few years which discusses issues around trading and risk*. One of the biggest problems, I see, and one of the most common topics which come up in our group for discussion, is the matter of discipline and the inability of people to exercise self-control in their trading. The link between marshmallows and success in trading is now hopefully apparent: Learning to delay gratification, to resist temptation and to not give into to impulses are key factors contributing to people’s success in their work as traders and investors. If you can learn to exercise self-control and to become familiar with the idea and concept of working towards delayed gratification, you should start to see improvements in your performance and the start of a journey to stronger returns. However, simple as it sounds, we know it’s not that easy.

Baltazar Gracian: “Let the first impulse pass. Wait for the second.”

I admit, that as a trader myself, it felt good to sometimes 'go with the flow' and ‘to live for the moment’, to 'jump on an idea' or 'be swept away with the crowd'. Sometimes it would work, but all too often those trades were the rotten ones. Yet, one must ask the question there, why I did do them? These were trades which just liberated me from my money and handed it over to someone else. The answer, 'they just felt good', rather like the young children who ate the Marshmallow, they were moments of weakness. A lack of plan, structure or self-control are not healthy philosophies for life, nor a good recipe for success in trading or investment. They leave you vulnerable, exposed and lacking direction. It is at these times that you are most likely to fall victim to unconscious biases, to give into emotionally driven decisions, or to let your ego trample all over your trading.

Of the many successful traders I have worked with or coached, I could not say that any of them based their philosophy on leaving things to chance, they had plans and structure, and were rigid in how they enforced them. This does not mean they can not trade ‘from the seat of their pants’, far from it, in fact the planning and structure which is part of how they work, aid them in being able to to trade in this way. Within what may appear to be a random process, for many of these traders there is a method; an approach and a consistent attitude which result from a plan and which add up to a structure.

Behavioural Change

Learning to change or adopt a new behaviour is not easy, there is no simple switch nor a magic potion. Certainly some people can wake up one day and say from now on I’m going to be different, and for a few weeks maybe they’ll adhere to that new way. But the likelihood is, that within weeks if not months, like the failed dieter, they’ll be back to their old ways. The reason is that old behaviours and ways are firmly lodged, coded and hard-wired into one’s brain and neural paths. True behavioural change takes effort, hard work, commitment and time: It involves physical changes in the brain, and when it comes to making that new behaviour into an ingrained habit, there is no simple answer to how long it can take. The problem is that behavioural change isn’t something that a person just suddenly chooses to adopt, you have to slowly learn a new habit, you have to ‘overwrite’ a new habit over the ingrained existing habit, with constant repetition over time. These steps are something I will cover in a future article, for now however, if you recognize yourself as a potential one marshmallow trader, try and follow the advice of 17th century Spanish philosopher Baltazar Gracian, “Let the first impulse pass. Wait for the second.”

*The LinkedIn Group is called ‘Trader, Trading & Risk Psychology’.

This videoclip shows highlights of a reproduction of the original Stamford experiment.

To find out more about how Chrysalis Performance Consulting can help you or your people improve & enhance Trading and Investment Performance, email us at trading@chrysalis-pc.com or visit our website www.chrysalis-pc.com. for more details. 

You can also view & download our ebrochure at www.chrysalis-pc-ebook.

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Chrysalis Performance Consulting Ltd is the new name of BGT Edge Ltd. 

Mindfulness for Traders and Active Investors

Mindfulness is a hot topic in trading, investment and risk-taking, however few people really understand what it is, how to use it effectively, and how powerful it can be.

What exactly is Mindfulness?
Mindfulness is a westernized secular concept, with deep roots in Buddhist philosophy and practice, which is

gaining increasing acceptance as a powerful tool to help people reduce stress and anxiety and to more fully focus and engage with the immediate task in front of them.

Jon Kabat-Zinn, Professor of Medicine at the University of Massachusetts Medical School, is the person generally accredited to adapting Mindfulness for use in the west. In particular he was influential in developing ‘Mindfulness Based Stress Reduction’ (MBSR), a highly effective tool for helping people with chronic depression, anxiety and stress.

In the past few years, use of mindfulness has expanded beyond the fields of medicine and is now being employed in a wide array of fields to help enhance performance in areas where focus, concentration and resilience are vital. Some of the areas where mindfulness is now practiced include education, the military, business, sport, performance arts, and investment management.

What is Mindfulness practice?
Mindfulness is the continuous practice of being in touch with the present moment. Jon Kabat-Zinn, describes it as follows: “Paying attention in a particular way; On purpose, in the present moment, and non-judgmentally.”

Kabat-Zinn himself was inspired and influenced by the Vietnamese Buddhist monk ‘Thich Nhat Hanh’. Hanh sums up what I believe Mindfulness is aiming to achieve in the following quote:

‘The best way of preparing for the future is to take good care of the present, because we know that if the present is made up of the past, then the future will be made up of the present. All we need to be responsible for is the present moment. Only the present is within our reach. To care for the present is to care for the future.’

Development of a Mindfulness practice, using regular meditational techniques, aims to help a person achieve a relaxed, non-judgmental awareness of their thoughts, feelings and sensations so that they have a direct knowing of what is going on inside and outside them self, in real time. Each and every person can, with the help of guidance, develop a practice which suits their particular lifestyle and challenge.

How does Mindfulness help trading and investment? Practicing "mindfulness" has helped many traders stay focused and make better decisions based on objective data, beliefs and facts. Through mindfulness you become aware that you, your thoughts, your biases, behaviours and beliefs are not one and the same. Mindfulness allows you to step back from the fray and observe yourself and your reactions to be more aware of what is happening within yourself and around you.

One of the most destructive practices one engages in when trading is that of self-judgment. This may involve comparing oneself against ideal levels of performance, against your own very high expectations, against your beliefs in the inflated expectations others have of you, or against various alternative better outcomes. Self-judgment is rarely positive, and no matter how accomplished or happy one is, they may often hold on to negative self-judgments which have the power to undermine one’s confidence and self-belief. Self-evaluation is different to Self-judgment, Self-evaluation is observation of one’s own actions, but where the message is not laced with the poison of self-judgment or self-criticism. Traders with a well-developed mindfulness practice, and a mindful way of being, are more conscious and aware of them self, their actions, and their re-actions to events and news. They are able to gain control of themselves, and can start directing their resources and energies in a productive manner. One can never control the market, but they can have greater control of themselves, of how they see the market, and how they react to the market. This, together with a sound trading and risk management strategy and practice, should enable one to be a more productive and profitable as traders and investors.

Chrysalis Performance Consulting Ltd
To learn more about our work in helping improve Trader and Fund Manager Performance, visit our website www.chrysalis-pc.com or contact us at trading@chrysalis-pc.com

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A Trader Recounts the Pain of Losing.

A coaching client of mine at a bank has sent me a brilliant email that they penned this morning. They have given me permission to post it on my blog, so long as they and their firm remain anonymous. (Rest-assured all my client's discussions are confidential, unless the client provides permission to reveal details, as in this case.) I feel it will be an interesting read to all traders and active investors alike, who I'm sure will resonate with some of the feelings echoed in this email. 

The email:

I had a bad trading yesterday, not a disaster by any stretch, but a bad day, I was run-over by the EURUSD action post the ECB meeting. That is part of trading, sometimes you win, and sometimes you lose.  – However what I always find hard is how unpleasant and disturbed I feel the next day, even though I have been through it on many hundreds of occasion in my career.  It seems you can never escape it, it never becomes a neutral feeling, but always a bad feeling, an ugly feeling. 

A few months ago, I decided to write down how I felt in my journal. I did this because I realised then, that within a few days the feeling is forgotten, and I usually cannot even describe the feeling a few days or weeks  later, however I do know that it may have had a detrimental effect to my trading which usually has aggravated the original setback.  I thought that way, the next time I have it I can compare how it feels now to how it was then. And I can also ensure that in future I take the best course of action, which in the past I have not always done.

This is a copy of the note I made then, about the same feeling I have now:

‘The first thing I notice is I feel tight around the back of my neck and have an uncomfortable feeling running down my back and down my arms from my shoulders. It is not a pain, but a nervous and unpleasant feeling, it runs almost to my fingers. As a result of this feeling I think I am more hunched when sitting at my desk. I also have a little of that feeling running down the front of my legs. Overall the feeling makes me feel a little heavy and slow. 

The feeling is also unpleasant in my head, but it’s different, my head feels a little hot as well a heavy, and also slightly fuzzy in a way that is hard to describe. There is a kind of pain running around it, but not a headache or migraine. It is focused mostly on my upper front part of my head. I am also slightly clenching and almost grinding my teeth, this makes my jaw feel tight and heavy. 

My mood is angry and slightly dark, on the one hand I am distracted from my normal morning routine, but also I would say I am more focused on the market than normal, my eyes are darting across the screens looking for news, data, watching prices and scanning charts. This is not good for me, because I work best in a structured way and this morning I feel like I have been knocked out of my stride. I can sense an impulse to get involved straight away, to go into the market and try and fight back. It is almost as if I have been insulted and need to both seek revenge and prove myself.‘  

The odd thing is, that the loss I suffered then and yesterday’s loss were not devastating losses, far from it. Also I know that losses are part of trading, I accepted that long ago, and in doing so that became a big part of my trading philosophy, a big part that I think has contributed to my success over the years. Yet, no matter how big, and often how small my losses are, I always feel the same. I am a rational person, and I know I will most probably recover, yet at this instance my emotions are fighting to over-ride my logic. – My experience and my head has taught me over the years not to trade when I am like this, but my immediate desire is telling me to get straight back into the trade. 

Yet if I do this it is likely to be the battle for me, and I will almost certainly lose. – Therefore I am removing myself from the screens. I will not look at the market all day. I know many people who are running portfolios and trade-books can’t do that, I however have that luxury. By Monday I know I will probably have recovered my composure, though the feeling will probably linger in a smaller way for a few days, and I must proceed with extra caution for a while.  

I am sure most traders, fund managers and active investors reading this will resonate with this, and in particular will also recognise the internal battle between the rational and emotional. – If anyone would like to know more about that internal battle, I would strongly recommend buying or downloading a copy of Professor Steve Peter’s brilliant book ‘The Chimp Paradox’.

If you would like to know more about Trader Performance Coaching please email me at steven.goldstein@chrysalis-pc.com or visit our website www.chrysalis-pc.com. Chrysalis Performance Consulting Ltd is the new name of BGT Edge Ltd

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Bad Trading Days - We've all had them!

We've all had bad days right, after all no one is immune to them. That is the nature of the job, its about trying to monetize risk and uncertainty. But do you remember how you felt when ti happened, how you reacted, and how painful it was.

This video clip, from back in 2009 may remind some of you at least of how it felt. - I do hope it was not as painful for you as it was for this guy. - Be warned, the language is somewhat colourful.




I do hope for this guys sake, that he learned from it and recovered it.