In my weekend reading I came across a phrase called ‘time inconsistency’ in the field of behavioral economics. Time Inconsistency refers to the tendency of the human brain to value instant gratification more highly than future rewards. And I was struck by how familiar I was with that aspect, as I see it every day around me in the markets! It works something like this.
It is that time of the year when we make some long term plans- like losing weight or gaining some skill or doing something that you have long since wanted to. Now, all of us make it but almost none of us end up doing it. Why so? Time inconsistency is the answer. See, when you make the plan to lose weight for e.g. you are looking at the future, you are imagining a slimmer self, the advantages that it would bring, the health benefits of slimming etc. etc. It is easy for your brain to see the value in taking actions with long-term benefits.
When the time comes to make a decision, however, you are no longer making a choice for your future self. Now you are in the moment and your brain is thinking about the present self. And researchers have discovered that the present self really likes instant gratification, not long-term payoff. This is one reason why you might go to bed feeling motivated to make a change in your life, but when you wake up you find yourself falling into old patterns. Your brain values long-term benefits when they are in the future, but it values immediate gratification when it comes to the present moment. Time Inconsistency refers to the tendency of the human brain to value immediate rewards more highly than future rewards.
Traders do this all the time. They look at stocks that have performed big time and wail that they were not part of that move although it happened right under their nose. Then they swear that they will now stick to a position to see it through till the end. They ask their advisors to recommend one such. It so happens that such stocks are always available. They get a name. Determined, they take up a large position. That’s the greed of instant gratification.
The stock now moves in favor. They are now sitting on a sizable profit, something larger than all their recent gains. Instantly, the need for immediate gratification takes over. The belief in the long term is abandoned- not because one does not have faith in it but because the urge to gratify oneself immediately is so much more compelling. As a result a smaller profit is booked and one is out of the trade as it continues more and more into deeper profits.
How does one overcome this habit? First is to realize that it is a normal behavior. It is simply a consequence of how our minds work. Given this tendency, we have to resort to specific methods to overcome it. These are learnt methods. You have to get into them just as you would into an exercise regimen. It’s not easy. More, they have to be taught to you. There are many self- improvement books but hardly any self- improvement actually takes place!
Unfortunately in India, trading psychology is not really recognized as a need and there are hardly any trading coaches. At Growth Avenues, we are seized of this issue as we believe trading psychology to be the MOST important element in success in the market. We hold courses on the various pitfalls of the mind during trading a few times in a year. If you would be interested and are seriously ready to be coached (that is a requirement, by the way) then you may contact the office for the next program.