The Psychology of Trading

by Brett N Steenbarger

  Chapter Four

  Traders Out of Their Minds

  One "I" is needed to sustain a vision.

  In Chapter 3, we explored how markets elicit emotional responses that color subsequent thought and behavior. This chapter will go a bit deeper and explore the topic from the inside, drawing on research findings from cognitive neuroscience. These findings raise intriguing questions about our identities, challenging the notion that humans have fixed, unitary personalities. Indeed, the presence of multiple personalities—long held to be limited to a relative handful of pathological cases—appears to be the norm. This poses important dilemmas for traders, who may find their well-honed and practiced strategies undermined by qualitative shifts in their patterns of thinking, feeling, and acting.

  THE WORLD'S MOST POWERFUL GLASSES

  Suppose I were to tell you that the most powerful pair of lenses you could wear are not prescription lenses. They are the simple safety glasses made of clear plastic. You can purchase them at any hardware store to protect your eyes from flying fragments while doing woodwork or gardening.

  The catch, as discovered by Harvard Medical School psychiatrist Frederic Schiffer, is that you must purchase two such pairs of glasses. Then you cover three-quarters of the field of vision of the first pair of glasses with electrical tape so that you can see only out of the outer corner of your right eye. You similarly cover three-quarters of the lens area of the second pair of glasses, leaving exposed the outer edge of the left eye.

  As it turns out, people not only see differently through the two pairs of glasses; they see themselves and the world differently, as well.

  Schiffer's reasoning was elegant and disarmingly simple. Physiological studies have shown that the far right side of a human's visual field maps onto the left brain hemisphere. The far left side of vision is processed by the right hemisphere. In most people, verbal processing of information occurs in the left hemisphere. Much of a person's emotional processing occurs within the right hemisphere. This division of labor between the brain hemispheres is so striking that cognitive neuroscientist John Cutting has argued that humans actually possess two minds. Mind #1, as he calls it, is largely centered in the left hemisphere and helps people understand what things are. Mind #2, right-hemisphere based, enables people to perceive the value, meaning, and relevance of things and events. The crucial quality of these minds, Cutting emphasizes, is that they operate, not serially, but in parallel. At all times, these two minds are continuously scanning the world for the identity of the things a person encounters and the self-relevance of those things. What is experienced seamlessly as thought is actually a delicate coordination of these two minds.

  Schiffer's glasses are an elegant way of separating Mind #1 from Mind #2 without undergoing surgery to the corpus collosum, the fibers that connect the brain hemispheres. Years ago, epileptic patients of Dr. Roger Sperry needed such surgery to short-circuit the signals that led to intractable seizures. The researchers were stunned to find that the patients undergoing such surgery could both think and feel but could not readily coordinate the outputs of their "minds."

  Subsequent studies conducted by Michael Gazzaniga and colleagues found that when "split-brain" patients were shown an image to their left eye only (connected to the right hemisphere), they could point to a picture of what they saw but could not name the item. They knew what they saw, but their knowing was not of the verbal type. Even more strange, when presented different pictures simultaneously to each eye, patients could point with each hand to what they saw, but they could only verbally describe the picture presented to the right eye. (Only later did Gazzaniga think to ask the split-brain patients why they had pointed to the two pictures while describing only one. The answer he received led to one of the most important findings in modern cognitive science, a finding—as you shall see later—that is crucial to understanding the psychology of trading.)

  Subsequent studies managed to investigate the two minds without severing the corpus collosum. Patients who experienced severe damage to one brain hemisphere but not the other offered useful insights into the cognitive workings of the brain. A process in which just one brain hemisphere was anesthesized while the other was left alone, called the Wada procedure, was also revealing, in that it allowed patients to be questioned with one of their "minds" turned off.

  Schiffer summarized fascinating studies conducted by Geoffrey Ahern and colleagues, in which the Wada procedure was used to investigate the emotional functioning of two patients who had been suffering from epilepsy. Both of these patients were known to experience mood swings so extreme that it seemed they had two completely different personalities. Through the Wada procedure, Dr. Ahern was able to demonstrate that each personality was lateralized to a specific brain hemisphere. When one hemisphere of the brain was anesthetized, the patient was relatively happy and outgoing. When the other half was anesthetized, the same patient would be moody, sullen, and even belligerent!

  In a similar vein, Robert Ornstein, in his book The Right Mind, described case reports in which a split-brain patient attacked his wife with his left hand while trying to restrain the aggressive hand with his right. Another split-brain patient, when asked to point to words describing his ambition in life, chose "racecar driver" with his left hand (right hemisphere) and "draftsman" with his right hand (left hemisphere). Summarizing a wealth of literature from cognitive neuroscience, psychology, and philosophy, Cutting concluded that people possess a second mind, one that governs emotion, will, and needs-directed action and that is grounded in the right hemisphere and operates separately from the verbal, thinking mind.

  The patients described by Ahern and Ornstein were unique in that their subpersonalities seemed completely distinct. It may well be the case, however, that these patients differ from you and me only in the extent of their polarity. In an excellent book entitled Being of Two Minds, Arnold Goldberg described how many therapy participants display what he calls a vertical split of personality. This is a situation in which an individual experiences a part of himself or herself completely alien to the normal personality. Often, this "part" of the person compels the person to perform actions that are completely at odds with the individual's normal, acceptable behavior, creating considerable guilt, shame, and distress.

  I have seen many such examples of vertical splits. Recently, I met with a woman who was generally a self-confident, capable professional who prided herself on her appearance. Every so often, however, she would lapse into periods in which she would feel completely incompetent to make even the most basic decisions. During these episodes, she ate great quantities of chocolates and ice cream and put on significant weight. Afterward, she looked back on her behavior and couldn't believe what she had done. For a while, she would "pull it together"—until the next episode.

  An even more dramatic example of vertical split was a successful physician who met with me because of problems in his marriage. He was married to a caring, capable woman who also had a successful career. They had a child and by all accounts loved each other and enjoyed their lives within the family. Every so often, however, the doctor felt a compulsive need to gamble at a local casino. He felt guilty and even "raunchy" engaging in such behavior—many of the gambling participants were unsavory characters—and he did his best to hide his activity from his wife. Eventually, however, she discovered something was amiss when she went into their savings account and discovered a dramatic shortfall. She felt shock and betrayal and was troubled by his inability to explain why he spent his time in this manner. Like other patients who describe impulses to surf pornography sites, expose themselves, or use drugs, the physician could only weakly explain that something "came over him." He loved his wife, he insisted, and didn't want to hurt her or lose her.

  Dr. Goldberg's contention is that these clients might well be telling the truth. Something really is coming over them, and they don't have complete control over its emergence. This second personality is "split" from the normal personality that they identify
as their own, and it appears to have its own traits, needs, and behaviors. Perhaps when people are caught in dilemmas in which they say, "My heart wants one thing, but my head is telling me something else," they are stating more of a truth than they recognize. At such times, a person really is torn between two selves, two minds.

  The implications for trading, I would submit, are monumental. When traders complain of making impulsive trades or of not being able to pull the trigger—when they look back on a trade and wonder, "Why the hell did I take that position?!"—perhaps there is a reason for their seeming self-defeat. Maybe they didn't place the trades at all. Perhaps, like the gambling physician and Gazzaniga's patients, they really weren't in their right minds.

  PHIL, THE ADDICTED TRADER

  Not being in his right mind appeared to be exactly the case with Phil, a trader with whom I talked over the phone. Every so often Phil would reach a high water mark in his equity curve and then proceed to increase his size, extend his holding periods, and ignore his stops. Needless to say, this led to catastrophic losses, which brought his equity to drastically low levels. At that point, chastised, Phil would reduce his size, trade in a rule-governed fashion, and religiously adhere to his exit plans.

  This cycle had occurred several times before Phil e-mailed me. Normally I do not engage in ongoing coaching or therapy for traders, given the demands of work, home, and trading. Nevertheless, Phil seemed to be a genuinely talented trader who was tortured by his seemingly self-destructive behavior. Hopeful that we could address the issue briefly, I agreed to conduct a phone session with him on a courtesy basis.

  Phil's Dual Personality

  As I collected a history from Phil, it became clear that his irregular trading stemmed from a basic personality inconsistency. Everyone is familiar with the tale of Dr. Jekyll and Mr. Hyde and the story of Superman, who is also Clark Kent. Phil's personality embraced a similar duality.

  Most of the time, including his phone conversation with me, Phil was a soft-spoken guy who traded conservatively. He was a real family man, and he took his responsibilities as a father and husband quite seriously. It killed him to think that he was not providing well for the family since going full-time with his trading in the past year. He wanted nothing more than to be a success at his chosen occupation, and he expressed a willingness to work hard to achieve that success.

  Once Phil began to reap the benefits of his hard work, however, his perspective—and, it seemed, his personality—shifted. His wife noticed this because suddenly he began talking about being a successful trader, making a lot of money for the family, and so forth. He became unusually expansive and confident and began making elaborate plans with his wife for expensive vacations, car purchases, and the like. Even his wife was able to detect this pattern, begging him to "take it easy" when she saw that he was feeling overconfident in his trading.

  This polarity of thought, feeling, and behavior was so dramatic that I would have thought it to be part of a bipolar disorder, but for the fact that it occurred at no other times in Phil's life. Prior to his trading career, he never appeared to have such swings; and during periods when he did not trade, he never demonstrated such overconfidence.

  I was perplexed as to the nature of Phil's problem until he revealed to me that he had abused cocaine as a college student and shortly after his graduation. He assured me that he hadn't gone near cocaine in many years and that this was not a factor in his trading.

  I asked Phil to describe what it felt like to be high on cocaine. As you might expect, he experienced feelings of power and euphoria; he described himself as "on top of the world." At that point Phil stopped himself and pointed out the obvious: He was getting the same high from trading that he had experienced with cocaine. Once he had a series of winning trades, he became intoxicated with his success and was on top of the world.

  This made sense to Phil, as he recalled "being a different person" under the influence of cocaine. He was more gregarious and felt more confident. He tackled challenges readily and felt that nothing could stand in his way. With some embarrassment, he described to me how he had recently felt the same way in the market, boastfully posting his trades to an online bulletin board and giving advice to others. These trades ended disastrously, as did his brief online advisory career.

  Phil enjoyed cocaine—and trading—because they allowed him to be a different person. Under the stimulating influence of markets and drugs, he could catch a glimpse of himself as a heroic being. Unfortunately, it was counterfeit heroism, artificially induced and incapable of being sustained. But his basic impulse was a healthy one: to feel powerful and in control of his life. From a solution-focused perspective, our task was to find constructive ways in which he was already achieving some of this feeling and to help him generalize this to his trading.

  The most obvious way that Phil was feeling in control of his life was through his success in dealing with his cocaine addiction. Phil stopped using cocaine after he met the woman who was to become his wife. She made it plainly clear that she would leave him if he continued his drug use. Phil realized that this would be a major loss, and he began attendance at a Narcotics Anonymous (NA) group, which operated on the 12-step principles of Alcoholics Anonymous. He subsequently became a mentor and sponsor for many new members, aiding them in their desire to stay clean. Phil experienced himself as a competent individual in NA, and he loved the fact that his wife respected him for his progress against the addiction.

  I asked Phil if he would be willing to commit himself to a course of action to change his destructive pattern of trading. I emphasized to him that he had already made great headway against one damaging pattern in this life and that we could make use of this experience in changing his pattern of trading. "I'll try anything!" Phil exclaimed, again asserting that he wanted nothing more than to be a success as a trader.

  I asked Phil to put his wife, Rhonda, on the phone. She, too, expressed an urgent desire to help Phil. To my surprise, she stated (within Phil's earshot) that she could not continue in her marriage under the present circumstances. "I need more financial security," Rhonda cried. "We can't pay our bills." Rhonda explained that she had grown up in poverty and could not stand the feeling of financial insecurity. She loved her husband, but she could not go from month to month wondering how the bills would be paid.

  I empathized with Rhonda and asked her to put Phil back on the phone. His voice was now shaky; he recognized that the problem was much graver than he realized. And I realized that my simple phone consultation had quickly become a full-blown crisis intervention.

  Activating the Observer

  At the moment Phil returned to the phone, I was aware of feeling angry toward him. Initially, I thought that I might be blaming him for getting me in deeper than I cared to be. Quickly, however, I dismissed this idea. Generally, I like dealing with crises and high-pressure situations in therapy, and I was genuinely interested in seeing this couple resolve their problems.

  No, I acknowledged, I was angry toward Phil because he had upset his wife to such a great degree. It was clear that she was a dedicated spouse and had grown up with her share of life challenges. How could he be so oblivious to her pain? And why, I found myself wondering, didn't he get out of the house after trading hours and take up a job to bring in a little money? Surely he must realize that his wife is struggling with the bills!

  It was at that point that my Internal Observer kicked in. I was angry toward Phil for the same reason that Rhonda was contemplating leaving him. In his self-absorption, Phil had neglected her, just as his preoccupation with success allowed him to neglect his trading discipline. Phil, it appeared, not only acted out his pattern with cocaine and trading, but also went through cycles of diligence and neglect in his marriage. Only this time, he was threatened with the possibility of losing everything: his trading and his wife.

  I carefully explained to Phil that I realized that he cared about his trading and his marriage. I told him that his patterns in trading were going to m
ake him lose both of them and that he needed to involve Rhonda in any solution, just as he had done when he joined the NA group. Phil was very open to this idea and readily put Rhonda back on the phone when I asked to speak with her.

  I asked Rhonda to help make Phil a good provider for the family. Toward that end, I suggested, she would keep all the books for the trading business. No money would be added to the trading account for at least a year. Once the account gained 10 percent in value—a point that occurred before Phil's overconfidence normally kicked in—the profits would be deposited into the family savings account and not reused for trading. The couple, together, would then chart their savings "equity curve" and use any surplus money to buy nice things for themselves, since this was now a team effort.

  I presented the idea to Phil as necessary to help Rhonda. She had been traumatized by the poverty of her childhood, I pointed out, and he needed to be there to support her. The best way he could do that was to concern himself with her equity curve—the family's savings account—and not his own.

  Phil immediately warmed to the idea. Rhonda was also happy because she felt this would give her better control of the finances and would demonstrate Phil's commitment to her. I was pleased to learn several months later that the couple was out of the hole financially and doing well in their marriage. After all, Phil already had experience helping others in crisis through his work as an NA sponsor. Once we redefined Rhonda as the client, he was more than willing to achieve his sense of mastery by addressing her needs. He didn't have to be a big shot in the market if he could feel needed and effective at home.

  Meanwhile, Phil's trading benefited because he was never able to grow his stake by leaps and bounds. Before the account would get to the point of triggering his addictive sense of power, the money had to be withdrawn for the family savings account. In a very real sense, Phil's pattern of making money and then going back to square one continued after our session. Only this time, he and Rhonda were purposely bringing the account back to square one, where he could not afford to take further losses. Because he no longer had the house money of his profits to play with in his trading, he had to strictly adhere to his discipline or risk an end to his trading career altogether.