In my article ‘Are we in the Era of the Cowboy Investor?’ I discussed how modern technology and quick access to information seems to have caused many traders to take a shortcut (at their peril), when learning how to trade. However, it may not be entirely correct to blame laziness for the poor success statistics in the market; the issue may in fact be another undesired by-product of online activity.
The Online Disinhibition Effect and Trading
It has been said that online technology and social-media create a feeling of solipsism in many users, which potentially leads to the ‘online disinhibition effect’ that causes individuals to exhibit behaviours outside their normal characteristics, due to the perceived lack of social restrictions. Yet, it appears that this solipsistic bubble produced by the use of online mediums is not just restricted to social situations. Many traders seem to display a similar lack of inhibitions and detachment from reality, which would otherwise be a defence-mechanism against poor market decisions.
Is Solipsism Simply Part of the Culture?
It is evident that solipsism often features as a key characteristic in many of the top, most successful traders (although, solipsism in this context could arguably be replaced with self-centredness). It may even be suggested that the institutional culture of ‘alpha male’ traders further encourages this feeling.
High performance in the market can make an individual feel superior, to the point that they feel they are ‘untouchable’ even after the bell rings at the end of the day. This behaviour was displayed prior to the financial crisis of 2007/8 when traders would make unwise decisions for their own gain, without the slightest thought for wider consequences. Some may put this down to recklessness or selfishness, but is it perhaps a sign of solipsism? Extreme egocentrism paired with the belief that they are the only relevant individual in the market.
So How Does This Relate to the Humble Day Trader?
Traders who work on their own, away from the boisterous trading floors of the ‘smart money’ clearly do not become indoctrinated with the same culture and work ethic. Nevertheless, the effects of solipsism still take control; particularly the concept of disinhibition.
The effects go beyond trading and also enter the realm of the long-term investor, or even occasional “I’ll have a punt” style investors. In the past, buying an equity position felt truly like a transaction and therefore carried a certain decision process with it. However, with the ease of online transactions, inevitably the thought process gives in to the temptation of an easy-ride too; much in the same way that plastic cards tempt higher spending than cash payments, since the money is no longer real.
Traders and investors, by looking at a chart on a computer and feeling no association with the underlying market full of individuals, may start to feel disconnected with what the chart truly represents. It’s not just the money that is no longer real, but also the market itself. Trading becomes a game and the chart becomes the enemy; there is no one else in the market.
Alternatively, a belief that appears to be in trend with online communities is the feeling of ‘us and them’, with ‘them’ being the financial institutions and HFT traders present within the market. It is these sort of ideas that compound the feeling of aloneness in the market, especially when traders are spending endless hours in isolation at their computer. The disinhibition effect has its chance to set in.
As a result of the disinhibition felt by the trader, negative side effects can occur, such as overtrading. This takes place since the trader no longer perceives the importance of external variables and other market players, but simply gets drawn into a trade by particular moves in the market triggering a knee-jerk reaction, without any thought of the consequences financially or intellectually of opening the trade.
Can Solipsism Influence Pre-Meditated Trading Strategies?
A similar solipsistic view can be seen in the actual development of trading strategies and entry setups. Strategies are developed with a clear disregard for what the market is actually doing, or even what the construction of the price involves. Any understanding of supply and demand is set aside in favour of market ‘cheat codes’ such as candlestick formations, oscillator extremes and crossovers. Inevitably, these strategies do not work and the traders lose money along with 95% of the market.
It has been my finding, along with the geniuses (far more intelligent than I) that I have worked with in my company, that the best and most consistent trading strategies (bar HFTs) are those that incorporate the understanding that the market is a grouping of more than one individual.
Although is not possible to measure every single behaviour in the market individually, it is possible to measure and predict behaviours based on a phenomenological model of market behaviour (i.e. modelling the behaviour of the entire entity, rather than individuals, in a similar way to thermodynamics) with consistent results. These findings have shown that tools and measures based on there being a ‘natural’ basis to the market, outperform strategies based on superficial measures.
Can Social Trading Combat This?
Conversely, movement from new traders appears to be towards ‘social trading’, which allows traders to discuss their trades and to adopt signals from ‘guru traders’. Unfortunately, rather than solving the issue, this can divide traders into two categories; some adopt similar solipsistic tendencies and some move to another extreme of ‘collective solipsism’.
Those who move towards solipsism with social trading, will see the other signals and discussions as part of their own consciousness and take it as information, rather than identifying that these are also individuals with their own opinion on the markets. They will trade this information without question, as it is simply another variable they have considered.
As for collective solipsism, this may appear to be an oxymoron (unless we have any George Orwell fans here – 1984) but is actually quite straight forward. Rather than the individual experiencing solipsism in isolation, they now are part of a group which experiences solipsism together; in other words, the external world outside of the group only exists based on the reality of the group itself. As a result of this, individuals may begin to rely solely on the collective trading signals and abandon their independence with their trading. Considering the majority of the market loses money, this is not a wise decision to make.
In summary, it appears that there are some benefits of solipsism, due to independent thought and the necessity of ego to have conviction in your trades. However, extreme egocentrism or solipsism can also have many detrimental effects on a trader, regardless of whether they trade in isolation or as part of a trading floor; these are tendencies we must manage in order to trade successfully. Being aware of the wider market and individual players will enhance your edge; even if they only exist through your consciousness!
People speak of greed being a deadly sin for traders – well, perhaps it’s time we also include solipsism to that outlawed group.