An interesting research report suggests that a particular brain region, the amygdala, is highly involved in loss aversion: the fear of losing money. It's interesting that the amygdala has also been implicated in post-traumatic stress reactions. As a fear center for the brain, the amygdala helps us recognize and recall danger. That is adaptive when our lives are at stake, but it can inhibit normal decision making when memories and reactions from past anxiety-producing events intrude into daily life.
An important insight that I came to when first working with traders was that many of their emotional reactions were similar to those who suffer from mild to moderate degrees of traumatic stress. This includes people who have been the victims of physical abuse, violent crime, or life-threatening accidents. It appears that threats to one's money and livelihood may be as emotionally impactful as threats to significant relationships or even threats to physical security.
If that is true, then many of the self-help techniques that we read in the trading psychology literature may be not very helpful for traders dealing with exaggerated responses mediated by the amygdala. Writing in a journal, talking with a coach, or visualizing positive outcomes would not be sufficient for reprogramming traumatic responses and overcoming emotional reactivity and loss aversion.
How could traders identify and address such problems? I will be dealing with this issue in upcoming posts.