Marcel Proust once said:
“A change in the weather is sufficient to recreate the world and ourselves.”
But if Proust were to go one step further, he’d say that mood is sufficient to recreate the world and ourselves. After all, our mood is strongly linked with what the weather outside is like.
Based on our experience as humans, we know all too well that mood can “recreate the world and ourselves”, impacting our thoughts, judgments, and perceptions.
For instance, if you’re in a bad mood, you’ll be more pessimistic in your judgment and decision making (Wright and Bower 1992).
On the flip side, if you’re in a good mood, you’ll be more optimistic in your judgement, choices and as well as your perception of risk. Happy decision makers are more optimistic about their probability of winning a lottery, for example.
After all, mood is rooted in emotion.
And emotions conceal motivation.
In evolutionary terms, emotions and feelings are highly rational proxies for calculation which bring us closer to satisfying goals that could aid our survival.
Emotions such as fear cloak a hidden motivation to avoid the very things that inspire that fear; feelings of attraction disguise the motivation to procreate with a significant other in order to pass on our genes into the next generation.
In all their irrationality, emotions are a rational, cool, calculating process.
Mood stems from emotions and feelings which conceal certain motivations.
If you’re in a sad mood, anxious mood, or fearful mood, the motivations driving your behaviour will differ.
And because they differ, they will all impact your trading in unique and insidious ways.
Being self-aware and cognisant of how mood can influence our trading decisions can cast an scathing light on the root cause of some of our most common trading mistakes as well as any bad trading habits we may have unknowingly developed.
If we can understand how mood influences our trading, we can better prepare how to navigate these different emotions in a way that doesn’t negatively impact our trading.
In this article, we’ll explore various emotions such as sadness, anxiety, and fear and talk about how these emotions can impact our trading.
Cognitive scientists conceptualise sadness as rooted in the loss or absence of rewards.
Whenever we experience sadness, it feels like “something is missing.”
This is often true — we experience sadness if we don’t succeed at something, if we go through a breakup, or we lose a precious item, for example.
So how do sad people tend to go about reducing their sadness?
If we feel that “something is missing,” then we’ll actively seek to fill the void.
That is, we’ll actively search for reward elsewhere.
One way this manifests is that sad people tend to buy gifts for themselves (Mick & Demoss, 1990).
Another way is that sad people have a tendency to help others because of the “feel-good” emotions we experience when helping others (e.g. Schaller & Cialdini, 1990).
In other words — sad people will seek out reward to elevate and repair their mood.
Sad people simply have different priorities in their decision-making.
In other words, they’re simply motivated to seek immediate gratification in mood reparation rather than delay gratification by making sound, reasonable decisions that would bring long-term tangible benefits at some point in the future (Leith & Baumeister, 1996).
How this translates to trading is that sad traders are more likely to engage in behaviours and enter trades with the sole purpose of repairing their mood.
This can be a very slippery slope.
Sad traders are more likely to FOMO buy into a green candle for a quick rewarding experience. They’d be more inclined to be influenced by the media in their investment decisions, buying into the sensationalism and hype.
They’re more likely to choose low probability trade set ups simply because they seem more exciting (i.e. emotionally rewarding). Anticipating potentially massive gains is a pleasurable experience in of itself and low probability trades are the best at providing those.
Low-probability trades offer the illusory promise of a huge payoff. What often goes along with that is higher risk. People tend to accept outsized risk in expectation of a huge payoff so sad traders are more likely to seek out high risk trades.
And finally, sad traders in an effort to repair their mood would be more inclined to delay the resolution of a trade due to savouring potential gains.
Being able to open your crypto portfolio tracker app and see that you’re enjoying a lot of unrealised profits is fun and rewarding. Which is why people often tend to prolong that enjoyment by being in no rush to cash out some of those profits.
Ultimately, trading behaviours rooted in mood reparation lead to emotional decisions. Sad traders will be biased towards selecting high-risk, high-reward trades as well as engaging in reward-focused trading behaviours, for better or for worse (mostly worse).
Trading on emotion is a recipe for disaster which is why it’s important to understand your mood and question the motivations underlying it.
What about anxiety?
How is anxiety understood and how does it impact your trading?
Cognitive scientists suggest that anxiety stems from high uncertainty (over something with potential harmful consequences) and a perceived lack of control over a situation.
Fundamentally, anxiety is rooted in insecurity.
And the way anxious people will cope with that is by wanting to become more secure — their behaviours and choices will reflect that desire.
So if someone wants to reduce anxiety, they would do that by reducing uncertainty and avoiding risk.
What are some of the ways this could manifest itself in trading?
Anxious traders are more likely to sell too soon, set stop-losses that are too tight, choose non-volatile options with limited profit potential, and miss out on profitable opportunities due to acute risk aversion.
Research has found that if people experience anxiety, they tend to have a preference for low risk, low reward options.
They want low-risk, high-certainty choices over low-risk, high rewards.
Anxious people simply don’t value high excitement, high reward trades like sad people do.
In fact, excitement and rewards aren’t the prime focus for anxious traders. The prime focus for anxious traders is more certainty and less risk.
After all, sad people want to repair their mood; anxious people want to just get rid of their anxiety by reducing the things that fuel it.
Research shows that if people are fearful, they’ll make more pessimistic risk assessments, leading to more risk-averse choices (Lerner and Keltner, 2000).
This easily translates into trader and investor sentiment.
The more fearful you are, the more bearish your price predictions will be, the more unrealistic they will be given how rooted in emotion they are.
The more emotional you are in your price predictions, the more they’ll deviate from how low price could realistically go.
This explains bearish euphoria — a phenomenon where traders and investors get overly bearish about market prices. That is, they over-exaggerate the extent to which price can realistically go down.
Traders that are overly fearful will wait for price to drop lower and given their unrealistically pessimistic price expectations, they’ll oftentimes miss out on a trend reversal which will have happened sooner than they had anticipated.
All it takes is a shift in your mood to influence how you perceive risk, what you are motivated by in your decision-making, and how you assess your trades.
Whether you’re anxious, fearful, happy or sad — all of these emotions will have unique influences on your decision-making process.
In other words, mood biases decision-making towards certain preferences.
Sad traders will be biased towards seeking out high risk, high reward trades in an effort to repair their mood.
Anxious traders will be biased towards low risk, low reward trades in an effort to minimise uncertainty and a perceived lack of control in their decisions.
Fearful traders will catastrophize reality and become more pessimistic in their assessments.
If we understand the impact that mood has on our trading, we can develop a better sense of self-awareness that would help us navigate these different emotions in a way that would benefit our trading.