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Does Ego Depletion Destroy Traders?

chainSome time ago I ran across this fascinating article published by the American Psychological Association (APA) on the power of self-control. The article describes an intriguing theory by a social psychologist named Roy F. Baumeister, who believes based on his research that willpower may be a finite resource which is regularly depleted. I have thought quite a bit about how this theory may apply to everyday life, and it occurs to me that it may be highly applicable to trading binary options as well.

Do You Ever Go On Tilt?

There is a nasty thing that happens to traders sometimes called “going on tilt.” This term is not universally used, and it actually is taken from gambling (and before that, from playing pinball), but it is one of my favorites to describe what happens to traders who lose control.

Going on tilt usually is something that sneaks up on you. One minute you are trading, you are fine, and the next you notice you are not quite as cool and collected as usual. There may or may not be an objective “reason” for this to happen. Maybe you have lost more trades than usual this week, or maybe you haven’t. Maybe you just feel less confident than usual.

Either way, the next thing you know, you are suddenly out of control. Your thoughts are spinning rapidly, your emotions are boiling over, and you are making one terrible trading decision after another.

Chasing losses is one of the most common examples of tilting in trading. You lose more trades than you expected to, or you lose one really big trade and you find yourself desperate to get it all back. This is not the only type of tilting, or the only reason for doing it. Traders sometimes tilt because they are angry and want revenge on the market. Other times they do it because they are bored and frustrated. Sometimes they even do it because they are overly confident and believe they can only win!

No matter why you start tilting, and no matter what emotions are involved, tilting always ends badly. This is how traders lose money—and sometimes burgeoning careers.

Previously I have cited some of the following psychological reasons behind tilting:

Tilting is a Compulsive Behavior

One observation we can make about tilting which is vital to understanding it is that tilting is always characterized by a loss of control. Traders who tilt may or may not feel like they are out of control, but they are. Their behavior is compulsive.

This is the definition of compulsive if you look it up on Google:

Compulsive: Resulting from or relating to an irresistible urge, especially one that is against one’s conscious wishes.

Sometimes traders who are tilting do want to stop, but wanting to stop somehow is not enough. Despite the fact that they are acting contrary to their will, they just keep doing what they are doing. People around them (and often the traders themselves) wonder why they are on such a self-destructive path, and why they cannot “simply stop.” This is particularly scary for the trader, who may feel like he is completely helpless inside his own mind. The trader who is tilting may feel like he has no willpower at all.

Defining Willpower

It is pretty tough to come up with a good definition for willpower—and to differentiate it from “will.”

Will has been defined as:

“The faculty by which a person decides on and initiates action.”

“A deliberate or fixed desire or intention.”

Willpower has been defined as:

“The faculty by which a person decides on and initiates action.”

“Conscious, effortful regulation of the self by the self.”

“The ability to override unwanted impulses.”

As you can see, these definitions overlap. But for the sake of argument, let’s define “will” as a fixed intention—for example, the desire to be profitable, and “willpower” as the ability to override impulses that could cost you money (the compulsion to go on tilt). Will in other words is something permanent. You do not simply stop wanting to be profitable and happy. Willpower on the other hand is something that may come and go. The choices you make are not always controlled by your willpower or supportive of your will. Sometimes they are controlled by your impulses and actually counteract your desires.

So What Depletes Willpower?

Why do traders on tilt suddenly lose all semblance of self-control? While the reasons that I have previously identified may be applicable, in the case of many traders, I believe that willpower is actually depleted—and with it, a sense of self.

As I mentioned at the start of the article, I base this theory on the work of psychologist Roy F. Baumeister. Baumeister ran a scientific research study where he gave two groups of students difficult geometry puzzles. Before giving them the puzzles, he presented them with freshly baked chocolate chip cookies. He told one group of students they could eat the cookies and then work on the puzzles. The other group he asked to resist the cookies and eat radishes. The cookies were available, so it was their decision and not his to resist eating them (an act of willpower). These students were permitted to eat radishes instead.

How do you think both groups performed on the geometry puzzles? “Common sense” might tell us that the group that resisted the cookies would perform better on the puzzles, since they had been practicing willpower and therefore would be in “willpower mode.” You might think the group that ate the cookies would do worse on the puzzles since they had not been practicing self-regulation.

If so, you would be wrong. The group that ate the cookies focused on the puzzles for an average of 20 minutes. The group of students who were told to resist the cookies was only able to focus on the puzzles for an average of 8 minutes.

This seems to imply that the students who resisted the cookies actually burned through a limited reserve of willpower in order to do so, and by the time they got to the puzzles, they simply did not have it in them to work on them. The students who ate the cookies and essentially took a break from willpower and tough decision-making had plenty of willpower left to work on the puzzles.

If you think about this, you can find examples of this from daily life. For example:

All of these examples look negative on their surface. Nobody wants to go on a bender that results in having to repeat a class. Nobody wants to fail at their dieting and weight loss goals. Nobody wants to explode at their spouse.

But you can see how that, in a way, their minds are attempting to hit “reset” by giving them a forced break from all that willpower. They have depleted it, and are left with nothing but compulsive behavior to act on. This of course leads to failure.

The trick of course is to look for ways to hit “reset” before you are left with nothing but your impulses. If you can do it routinely in small degrees, then you will never deplete your willpower completely. You will be able to go on performing at your best. In the above situations, the following solutions would work:

The dieter should choose a more moderate diet and allow himself a “cheat food” once a week.

The executive should look for ways to delegate some tasks and decisions, and should explore another avenue for catharsis besides yelling at his wife.

The student should study less and party more—sometimes the minimum work for a B actually pays off. It is better to get a B on both exams than an A on one and a D or F on the other.

What is Ego Depletion?

“Ego depletion” is simply what Baumeister and his colleagues decided to call this process of willpower depletion. Originally they were going to go with the term “regulatory depletion,” but they discovered that the depletion of willpower does not just result from acts of self-regulation, but from decision-making as well. As he states, “[W]e wanted a broader term that would suggest some core aspect of the self was depleted.”

This is a fascinating theory because it suggests that when we grind hard enough and long enough on important tasks, ironically we trading off something which is essential to maintaining the structural integrity of our identities. When your sense of self erodes, you not only lose the ability to make smart decisions, but you lose perspective as well. You may lose sight of what you want and what is important to you. No wonder that when we go on tilt we feel like we are totally out of control. How can you be in control when a core aspect of your sense of self is depleted? The you in you is temporarily disabled.

How Ego Depletion Can Make Traders Go On Tilt

According to Baumeister, research shows that on average most people spend three to four hours every day resisting their impulses and trying to stay on target. That is the average person.

The average person is not a trader. As a binary options trader, you have chosen a path which is actually a lot more stressful and intense than what the average person has to deal with. This is especially true since in all likelihood, you also work a day job. So you have all the stress that the average person has plus the added stress of trading.

If there is one word that comes up over and over again in trading psychology articles, it is “discipline.” Most successful traders cite this (along with adaptability) as the most important trait any trader can possess.

Each day as a trader you use discipline (we may as well just call it willpower) in the following ways:

To study and learn at every opportunity. In a way, being a trader is like being permanently enrolled in college.

To run ongoing backtests and demo tests on trading methods. Oftentimes, learning, testing, augmenting and implementing systems requires a lot of intense focus on challenging and technical concepts.

Self-control while trading. There is never a moment leading up to a trade or while you are in one where you are not on some level exercising self regulation and making difficult decisions. Even if you have a trading method telling you what to do, you still can do something else. Even sticking to that method and its rules requires willpower. Sometimes this means taking a trade when you are scared of pulling the trigger. Other times it means staying out of a trade you want to take but know you should avoid. It might mean riding out a trade when you have an impulse to exit early.

These are just a few examples. Doubtless you can come up with plenty more. No wonder traders sometimes crack under pressure and go on tilt. If the average person has trouble sticking to a diet or not throwing a tantrum at a spouse, no wonder binary options traders sometimes go on streaks of bad decisions.

Oftentimes when you work on your trading, you are already in a partially ego-depleted state. You have spent all that energy on your day job, and now, you have very little left to work with.

It does not help that a lot of traders go completely overboard. They interpret “discipline” to mean working on trading for six hours every day after getting home from a nine hour workday. This is a sure recipe for draining yourself of all self-control. It may happen quickly, or it may happen slowly, but eventually, you will probably snap. It very well may be that the moment stress converts to psychological burnout is the moment that ego depletion goes into full swing.

Another comment Baumeister made that is relevant to traders concerns what ego depletion feels like. Another study run by Kathleen Vohs, PhD, found that emotions and impulses are felt more keenly by those who are ego depleted. Baumeister likened it to “turning up the volume on your life.”

Now isn’t that exactly what going on tilt feels like?

What Can You Do About It?

Now that you have greater insight into why you may sometimes spin out of control and lose money as a trader, what can you do to prevent it? Here are some recommendations:

The ironic thing about ego depletion is that it is often experienced most strongly by those who are actually trying the hardest to succeed. The harder you fight to become a binary options trader, putting in endless hours and making difficult decisions, the more likely it is that you will throw yourself into a tilting cycle. This is why smart, dedicated traders often manage to blow up their accounts despite (and through) their best efforts.

The bottom line here is that you are not a trading robot. You are a human being who is always striving to walk the narrow line between impulses and true will, and the willpower it takes to do that is a limited resource, but one that can be—and needs to be—replenished. Ironically, replenishing your willpower often involves doing something impulsive and undisciplined.

So now and again give yourself a break. Take a day off, work shorter hours if you need to, and spend more time doing things which are fun for no other reason than that you enjoy them. Break rules with care and attention, and you will actually optimize your willpower and your performance. It is not the trader who works 15 hours a day who is likely to succeed. Indeed, that trader is likely to go on tilt and blow it all in a moment. The trader who is most likely to succeed is the one who puts in moderate, consistent hours and leads a balanced life. Discipline is not about never caving into your impulses—it is about moderating them and keeping them in check.


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