How Your Subconscious Influences Your Trading Decisions

TradingPub Admin | February 12, 2013

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Special thanks to Reynaldo Soriano for the following guest post:

How Your Subconscious Influences Your Trading Decisions

Psychologist Dr. John Zajonc found that individuals are often influenced by subconscious thoughts outside their awareness.  In his study, he showed individuals images and objects without their conscious knowledge.  When he later requested them to make choices, they chose stimuli they formerly had seen.  Thus, seeing an object in the past can impact your preferences.  He called this the “Mere-Exposure Effect.” (Zajonc, R.B. (December), "Mere Exposure: A Gateway to the Subliminal". Current Directions in Psychological Science).

What does this have to do with trading or investing, you may ask?  Firstly, why do you want to trade or invest in a particular stock, currency, or future?  Is it because you want to make money and you have done a thorough analysis looking at price patterns?  Or perhaps it is merely because you saw someone promoting and advertising stock recommendations on T.V. while you were getting ready to go to bed.  It does seem difficult to believe at first, but many of your choices may indicate unreasonable, subconscious processes.

Dr. Hans-Peter Erb’s research from the University of Bonn has shown that an individual’s economic decisions are often influenced by factors that are below their awareness.  (Erb, Bioy, & Hilton, 2002).  During his experimental study, members were requested to make a decision after completing an unrelated task.  Emotions elicited from the first task affected following decisions about risk.  These results demonstrate how individuals may be willing to take a risk due to subconscious feelings.

It's difficult not to be affected by images and feelings that enter our consciousness without our knowledge.  It is normal for human beings to have a natural emotional attachment to inanimate objects, like stocks, futures, and currencies.  Sometimes, it can be helpful.  For example:  You heard a product or service failing to perform at par, such as a new computer running too hot or an airline that tends to arrive late and misplace luggage.  Thus, your instinct is to avoid such companies.

We feel anxious when we experience negative events in our daily lifestyles.  Therefore, avoiding products and businesses that don't fulfill our purpose and objectives is a useful principle.  Unfortunately, the same processes also work for enjoyable activities.  When we see a nice car that everyone is buying, we usually want to get one for ourselves.  We will even neglect poor gas mileage if the car is in fashion, and "everyone" is buying one.  We bring these subconscious processes into our trading life.  We may "feel" good about a stock, currency pair, or futures contract, and buy it because of these feelings.  We may also take unnecessary risks because we have a hunch that the stock, currency pair, or futures contract will go up.  Sometimes our hunches or so called “intuition” are based on a rapid, astute analysis of existing data, but at other times, they merely indicate unreasonable subconscious preferences.

How can you defeat your subconscious?  Well, you can’t.  Don't neglect its importance.  You aren't a slave to influences below your awareness, but you aren’t immune to them either.  You may determine to make a decision based on nothing more than an amorphous feeling that has no basis in fact.   In the fast-paced world of trading, especially day trading, it is important to trade intuitively and base your intuition on factual evidence.  Before jumping into a trade too quickly, it’s worth being a little skeptical.  Try to reconstruct the information that you used subconsciously to arrive at your trading decision.  If you can’t come to a conclusion, you might want to rethink your decision.   Don't let your subconscious throw you off.  If you acknowledge the power of your subconscious, you will go far in stopping it from biasing your decisions.

By Reynaldo Soriano

Author – “Why You Could Be Destined To Fail In Trading and How You Can Avoid It!”