Why Human Psychology Doesn't help in Bear Markets

As human beings we have a number of useful psychological traits, when trying to survive as a hunter gatherer. However these can hurt a person as a trader, particularly when they do not realise their limits. If a trader understands these hard wired biases then they can be ahead of 90% of other traders.

The first human failing is optimism, which is not a failing at all in normal life. This means that spread betters do not like going short on shares and so tend to heavily buy shares. One of the great advantages of spread betting is that the spread betting services allow traders to go short on a share very easily. Due to the fact that going short on a share is otherwise quite complex for retail investors, it would be natural to assume that the majority of spread bets are on the short side. This is not the case, and the great majority of spread bets are on the long side.

Another hunter gatherer strength that can translate into a trading weakness is that the human mind is hard wired to see patterns, which is useful for a hunter trying to track down a large animal but which can mean that there is a whole range of ways in which a person can lose money. Firstly there can be an irrational attachment to superstitious signs, particularly if they worked in the past, such as not selling stocks on Thursdays. It can also mean that a person becomes attached to markets snapping back to normal.

It is possible to be ahead of the majority of traders in that although it is fine to "trust your instincts" it is often useful to recognise where your instincts are biased.