When a professional trader is faced with a stock dropping in price when he believes it will eventually go up, what does he do? Most people would believe that if one is confident that a stock will eventually rise, they should hold on to it. In fact, they should buy even more. It’s cheaper than ever. Selling it would be due to emotional fear, and a smart trader would stick it out.
But the reality is that the emotional play is holding on to belief. Because when all technical indicators are showing a stock is dropping in price, that is the true reality. The faith of it going up is simply a story one can tell themselves. And can also cost them.
How often do we see our own investments fall short of our expectations? Whether it be time? Money? Relationships? The easiest thing to believe is that we should stick it out. And sometimes we decide to push ourselves deeper, thinking it’s too important to us.
Why do we do this? And how can we be smart enough to recognize when it’s time to stop listening to the story and start dropping our investments?
Imaginative Foundations
When I finished my meditation retreat, I had a conversation with someone who considered him a day trader. It was somewhat surprising to me to find him at the retreat. But what was even more interesting to me was when we discussed books. He described one of his most favorite ones as Sapiens by Yuval Noah Harari.
It was a book I had just been reading before my retreat. It’s meant to be a historical overview of the history of mankind and the human race. The way Harari portrays this history is through the lens of stories, in a literal sense.
Harari references social research that indicates species like chimpanzees find it almost impossible to form groups larger than ~100. The reason being that chimpanzees, like all species, have to be able to trust others to form large groups. And the only way they know how to is by interacting with other members until they feel comfortable with them. And once there’s over 100 members, it’s quite difficult to stabilize that familiarity among all members. Think of it like this fully connected graph below. Every member has to know every other one. That’s hard to keep up at a certain point.
Now enter: Homo Sapiens. Curiously, we’ve been able to build groups not just in the hundreds of members, but in the millions (sometimes billions). And even more curiously, we don’t need to be completely, or even significantly, familiar with others to form groups. In fact, you might have neighbors you’ve never interacted with before! And you still see them from time to time and go about your day. You don’t think, “What if this guy tries to kill me? I can’t trust him!” like a chimpanzee would.
The reason that Harari finds for this is our affinity towards stories. That is, we can create a narrative that forms some type of belief structure. Things like religion, human rights, even nationality. We share and spread that narrative. The outcome of this is that, when you do come across a stranger, you already have something in common: a shared narrative.
Harari points out that stories have been the driver for large human social structures. Larger than any species. And it’s these large structures that have allowed greater success over other species for so many millennia.
Heuristical Reality
It was interesting to me for this trader to bring up the book in particular. In fact, I had been watching a Tim Ferriss on a Google Talk a few weeks prior who mentioned that nearly all investors he’s interacted with mentioned Sapiens as their favorite book. It’s a curious pattern to notice. What makes financial traders interested in a history book?
I believe the reason is because they’ve recognized an important fact of the book: the stories are made-up. We create them for social and psychological benefits. And most of the time, they help us immensely (something I plan to write about in the future). But they can also impede and block us from reality. Even if it’s staring at us right in the face.
The belief that a stock will rise is a story. The belief that someone we don’t like interacting with will get better is a story. The belief that the work we don’t like doing will eventually pay off is a story.
These particular stories come at a cost. They tell us that when things get worse, it’s all the more reason to put more into it, because of our belief it’ll get better. It’s a story we cling to, even when reality is pushing us in another direction.
For a trader, it’s financially important to recognize when a made-up story is keeping them from making the analytical move. For us, it’s that and so much more. Recognizing the stories that hold over us can be one of the most powerful tools to have. Because all humans have stories driving their actions. But very few understand what stories do what. And it’s a power that allows you to drop them when needed.
That doesn’t mean quit when things get rough. But I do challenge you to wonder where the indicators are in the wrong direction, yet you’re following the story you believe. It might be the smarter move to reduce your investment, not increase it.
