Making Money Feels Good; Losing Money Feels Worse

During my trading career, I have made money and I have lost money. And I can tell you that I much prefer making money. Making money feels good.

But here is the weird thing: losing money feels worse than making money feels good. Much, much worse. The pain and the pleasure are asymmetric.

Behavioral psychology offers some explanations why (see Daniel Kahneman’s “Thinking Fast And Slow“). Using proxies and measurements for pleasure and pain, they suggest that humans experience losing something they have roughly twice as severely as gaining something they did not have. Put another way, emotionally speaking, it takes twice as big a gain to make up for a loss.

This has direct applications to trading. It is another reason why I focus on strictly limiting my drawdowns: not only does the math work against you, but the emotions do too.

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2 Comments

  1. Make every loss an educational experience and both winning and losing can feel good. Just make sure winners, on average, are bigger than your losers.

    Reply
    • That’s fair, Chris: as I tell the kid, making a mistake is not an issue, but failing to learn from it is. Still, I find it interesting that a gain does not feel as good as an equivalent loss feels bad.

      Reply

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