Emotion is a fundamental part of being human. In classic economics, the emotional nature of humans was minimized as the framework was built on the assumption of rational man. Unfortunately, this leads to circumstances where outcomes are different from what economic theory would predict.
There seem to be two ways to deal with a reality that doesn’t fit the theory. One is to deplore our emotions and wish that people always acted rationally. The other is to try and adjust the theory to account for the way humans actually behave. Unfortunately, human behaviour doesn’t lend itself to systematic theories or mathematical formulas.
In my financial decisions, I try simply to be aware of my emotions. As an example, I have recently become more and more emotionally connected to the movements of the market. As soon as markets appeared to be rising, I got my hopes up (though I tried not to). Now, as I see the market slip back, I feel frustrated and angry.
It’s not wrong to feel that way, but it’s not helpful. To make good decisions, I have to pay attention to my internal dialogue. “I don’t want to place a trade, because this isn’t fun. It’s painful to watch it go down, and it’s painful to admit that I may have made a mistake earlier. I am not excited to risk making another mistake.” All of those thoughts are normal, but none of them are helpful. Rather, what action will have the greatest probability of making money?
It’s difficult to pay attention to my emotions, to accept them, but not to act on them. I’m not always successful, but I still think it’s the best way I can approach my financial decisions and take advantage of opportunities as they arise.