Charlie Munger – Cognitive Biases – Reward and Punishment

Incentives or rewards are powerful motivators for us.  They drive us to start & stop behaviors we enjoy or dislike.  This powerful concept affects us every day we trade both explicitly and implicitly.

Explicit incentives.  It’s very simple the more money we make the more we are incentivised to repeat those behaviors.  There is no boss that, says, “If you make double what you risked today, I’ll give you a 10% bonus.”  We do however, have a voice that tells us we’d be better off with more money

Implicit incentives: These, I believe, is what really motivates us.  Knowing that if you make more money you live a better life.  This illusion or fiction that you create incentivises you to make more money at trading.  This can be a dangerous path to take.  Because we may not be associating the correct behaviors with profitable trading.  A great counter example of this is over trading.  When we believe that trading for the sake of trading will yield a profitable result.  An example of a proper correlation with good profitable trading behaviors is typically, finding your patterns and playing those.

Let’s go Freud… The repetition compulsion.  You are not always rewarding your self with what is considered “good.”  You will see this with the popularized movie 50 shades of grey.  Being hit isn’t necessarily a “good” thing to most people but to some it’s rewarding.  The same thing can happen while trading.  If you have an underlying belief that, “You’re a bad trader,” or “I’m no good, i can’t do anything right.” You are rewarding the most powerful part of your brain (the unconscious)  every time you may a bad trade. You repeat this stressful pattern repeatedly, this is the repetition compulsion.  It’s my belief, that you repeat it, so you can become aware of it, so that you can have that cathartic moment to finally release it.  Sadly, however, this often is not the case.

Don’t ever underestimate the effects of rewards & punishment on your behavior.  They operate within and without our awareness.

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