Human ego: A cruel and financially crippling master
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When making an investment, investors should ask themselves whether their decisions are based on intuition or ego, technical analyst Lesley Beath says.
I have a friend who always says to people that I am "right-brained". If they don't quite understand what she is talking about she tells that I am good at "big picture stuff".
She refers to herself as "left-brained"--better at the finer detail (in her words).
What is this left brain/right brain all about?
I think one of the simplest and most straightforward explanations is: "The left side of the brain is logical, rational, linear, rule-oriented; it's the problem-solver, enabling us to build buildings, fix the plumbing, pay the bills, stay on schedule, negotiate our social encounters, and speak and understand others' speech."
"The right side of the brain is metaphorical, creative, intuitive, nonverbal, and emotional--all things that are unclear, hard to define and measure, hard to see as important."
Why have I brought that up today? And why the focus on which side of the brain is more dominant anyway?
In the investment world, it is said that people who can be proficient in using both sides of the brain are likely to succeed more often.
In the book The Winning Edge by Jake Bernstein and Adrienne Laris Toghraie, a chapter is devoted to integrating the left and the right sides of the brain--to create the "whole brain" trader.
And although that book focuses on traders, I believe it also relates to individual investors.
The conclusion was: "The whole brain trader is the master trader. The gaps for the right brain trader are in the area of detail, day-to-day discipline and the very important focus on the technical basis of trading."
"The gaps for the left brain trader are in the area of intuition and in the myopic focus on details which often prevent traders from dealing with the larger picture."
In a sense, to me, it could also be associated with a top-down and a bottom-up approach. Some investors excel in one, others in the other.
Which is better for trading? Bernstein and Laris Toghraie suggest "the matching of the technical/analytical abilities of the left brain with the intuitive/inductive abilities of the right brain is ideal for a trader".
In the book, The Intuitive Trader, by Robert Koppel, he says "the toughest part of trading, in my view, is to overcome the rigid intellectual guardianship of the left brain, which serves to habituate existing behaviours and to rationalise the need for 'logical consistency,' and thus to emancipate the intuitive right side of our brain, the key to changing ingrained thought patterns and habits".
There are some interesting thoughts by Herbert Benson in Your Maximum Mind. Below is a snippet of what he has to say:
"The left brain performs an invaluable service for us. Without it, we could not function effectively as human beings--because of all the information that comes in to our perceptual fields from moment to moment, it is indispensable in determining, at any given point in time what is important for us to know."
"Unfortunately, the left side of the brain is so important in its function that it has tended to overshadow the role of the right side of the brain. Yet the right side is the key to the plasticity of our minds, to our ability to change ingrained thought patterns and habits."
The right brain is also supposedly the location of intuition. Let's think about that.
The word intuition is often used to explain "a natural ability or power that makes it possible to know something without any proof or evidence".
Other descriptions include: "a feeling that guides a person to act a certain way without fully understanding why"; "something that is known or understood without proof or evidence"; and "how the mind can 'see' answers to problems or decisions in the absence of explicit reasoning--a 'gut reaction'."
Have you wondered if some investors just have a natural ability to get a "feel" for the situation, or whether that "feel" is the result of a million and one thoughts merging together?
In other words, what we can call intuition is the just the result of the inner mind pulling together years of experience with numerous facts about what is currently happening in the markets.
I also wondered whether intuition was the ability to subconsciously look through the chaos of the moment and come to an opinion.
Were those who were perceived as intuitive right brained?
Were they simply able to overcome the emotions that we normal humans struggle with when trying to invest in, or trade, the markets?
The one thing I think is clear when talking about intuition is that the more experience you have, the better.
Investors and analysts who have lived through numerous cycles in the markets will be able to look through the day-to-day happenings and draw on experience to give themselves the upper hand in beating the market.
I will let Albert Einstein have the last word on intuition. He once noted that "intuition is nothing but the outcome of earlier intellectual experience".
And while the right side of the brain is supposedly responsible for intuition, the left side of the brain is the seat of the ego.
Like emotion, ego is another enemy of the investor.
I will use an example taken from the book Zen in the Markets: Confessions of a Samurai Trader by Edward Allen Toppel.
"We read or hear something and immediately form an opinion, extrapolating the consequences of the information that we have just consumed."
"If we are wise, we will see whether the market confirms our opinion. More than likely we'll just jump in and take our position no matter what the market is saying.
"Then we wait for the market to prove us right. Sometimes it agrees with us immediately, and our position becomes an instant winner.
"When it doesn't, the trouble begins. Ego starts to tighten its grip over our ability to do the right thing. The right thing is to get rid of our losers immediately.
"The ego will produce the most fantastic reasons for holding on to that money-draining position, be it in stocks, bonds, options, or futures.
"Ego will fight us all the way and prevent us from realising quickly that it is better to swallow our pride and do the right thing. Take the loss before it becomes expensive.
"We know the rule that says take those losses quickly and move on. Ego gets between us and the rules in order to preserve its self-esteem. Really, ego has a life of its own within all of us.
"When we have a winner, ego manifests itself by coaxing us into taking our profits quickly. Why didn't it get us out of our losses quickly?
"The ego will get us out of our winners fast because it needs the immediate gratification of being right. It likes being right. It will deny being wrong."
Ego and intuition are the exact opposite of one another. Ego is driven and based on the outer world and is always seeking approval and security while intuition comes from within.
When making an investment we should ask ourselves whether our decision is based on intuition or ego.
Remember that the latter can be a cruel and financially crippling master.
To the extent that any content below constitutes advice, it is general advice (or, in New Zealand, a "class service") that has been prepared by Lesley Beath as a Morningstar authorized representative (ARN 469614) without taking into account your particular investment objectives, financial situation or needs. If necessary, you should consider the advice in light of these matters, consult with a licensed financial advisor, and consider the relevant Product Disclosure Statement (Australian products) or Investment Statement (New Zealand products) before making any decision to invest. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria.
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