Emotions in trading and how they linked to genes and instincts?

genes and instincts
emotions in trading

We talked about all the biases that humans have and how these biases negatively affect emotions in trading.

Economists and psychologists have extensively studied and widely acknowledged all these biases.

The question arises as to why we possess these biases that have such a detrimental impact, making it exceedingly challenging for us to achieve success in trading.

Let me break it down to you

Each of us possesses instincts, which guide our behavior in specific ways.

For instance, when a cat falls from a high place, it instinctively knows how to land on its feet. Similarly, when a baby needs nourishment, they instinctively cry, understanding that it will draw attention and fulfill their needs.

Numerous examples exist to illustrate this point.

Take sharks: from the moment they are born, they are independent and instinctively know how to hunt, survive, and navigate their environment without external guidance.

Hence, these instincts serve as their guiding mechanism. and these instincts are derived from their genetic composition.

Genes serve as a means of transmitting information across generations, allowing individuals to acquire knowledge and traits from their genetic inheritance.

The time-consuming nature of learning through genes presents a challenge, which ultimately leads us to the concept of evolution.

For example : Individuals exhibit similar types of behaviors as their parents and grandparents.

This leads us to the principle of “survival of the fittest.”

What is survival of the fittest mean?

“Survival of the fittest” is a concept derived from Charles Darwin’s theory of natural selection, which explains the process of evolution.

It suggests that individuals who are better adapted to their environment and possess advantageous traits have a higher chance of surviving, reproducing, and passing on their genes to future generations.

These advantageous traits increase the individual’s fitness, which refers to their ability to successfully adapt and reproduce in their specific environment.

In natural selection, favorable traits that provide a survival advantage, such as physical adaptations, behavioral patterns, or cognitive abilities, become more prevalent in a population over time.

This occurs because individuals with these advantageous traits are more likely to survive, reproduce, and pass on their genetic information to their offspring.

Over successive generations, the frequency of these advantageous traits increases, leading to the overall improvement of a species’ adaptation to its environment.

It is important to note that the term “fittest” in the context of natural selection does not necessarily refer to physical strength or dominance alone.

It encompasses a wide range of traits and characteristics that contribute to an organism’s survival and reproductive success.

Fitness is relative to the specific environmental conditions and can vary among different populations or species.

In summary, survival of the fittest means that individuals who are capable of surviving in a particular environment are more likely to do so.

If an individual possesses traits that are well-suited to that environment, they have a higher chance of survival.

Example:

Lets consider a group of giraffes, most of them have shorter necks compared to the giraffes we typically see today.

However, by chance, some giraffes may be born with longer necks due to genetic mutations that occur in their lifetime.

The infant giraffe born with a longer neck had a survival advantage since it could access higher parts of trees and feed on foliage that other giraffes couldn’t reach.

Consequently, these giraffes with longer necks had a higher likelihood of survival, enabling them to mate with other giraffes and pass on the genetic trait for longer necks to their offspring.

The evolution of longer necks in giraffes was not driven by a deliberate need to strengthen themselves or reach greater heights.

Instead, it was primarily a result of chance genetic mutations that proved advantageous for survival in their environment.

Those giraffes with the beneficial mutation were more likely to survive, reproduce, and pass on their genes to their offspring, eventually leading to a population with longer necks.

In a similar manner, consider bears. Initially, all bears may have been brown, but by chance, one bear was born with a white fur color.

This white-furred bear had a significant advantage in snow-covered environments as it could blend in and camouflage effectively, leading to improved survival.

Consequently, it had the opportunity to reproduce and pass on its genes for white fur to its offspring.

so its wasn’t really that white bears was stronger or anything like that. its just happened to be that they were better suited for that environment

Similarly, the same principle applies to humans.

Homo sapiens, commonly referred to as humans, have existed on Earth for approximately 200,000 years.

When we examine this timeline, we observe that the people who lived 200,000 years ago existed in an entirely different environment.

They faced constant threats from wild animals, had to engage in regular hunting for sustenance, and had to find shelter to survive. It was a stark contrast to the environment we experience today.

During that time, individuals who were able to survive in such an environment possessed specific traits.

Survival was not attributed to those who took risks, explored beyond their comfort zones, or engaged in venturesome behaviors, as such actions often resulted in danger and potential demise.

Those who possessed a more cautious approach, prioritizing safety and adherence to known strategies, were more likely to survive and pass on their genes to their offspring.

When considering the biases we have discussed, such as the status quo bias, it becomes apparent that certain biases would have had different outcomes in the past.

For instance, an individual with a strong inclination towards the status quo, preferring to remain in familiar territory, would have had a higher chance of survival.

On the other hand, someone inclined towards change and risk-taking, venturing out into the wilderness or engaging in risky behaviors, would have been more likely to face peril and, consequently, not pass on their genes to future generations.

Consider the endowment effect bias, which implies that individuals place a higher value on possessions they already possess and are reluctant to part with them.

Our ancestors, too, had this inherent tendency to hold onto their belongings for survival.

Those who were cautious and did not give away their food, weapons, or essential tools had a higher chance of survival, as they were better equipped to meet their basic needs.

Conversely, individuals who freely gave away their resources were less likely to survive and not pass their genes on to future generations.

All the biases we have explored can be linked back to the environment in which our ancestors lived, as they were highly beneficial for survival in that specific context.

The presence of loss aversion, the feeling that losses are more significant than gains, proved advantageous for our ancestors in the past.

Their strong aversion to losing possessions or resources helped ensure their survival, as those who were less concerned about losing their belongings and resources faced higher risks and perished.

Consequently, the genes we carry today are largely inherited from individuals who possessed this protective instinct of loss aversion.

Yes, we do possess their genetic material.

Genes undergo evolution and change over time; however, this process occurs at an extremely slow pace.

Consider the example of a machine learning system designed to recognize faces.

If you were to draw something on your face or wear glasses, you could easily deceive the algorithm, especially in the case of simple facial recognition algorithms.

However, when it comes to a one-year-old child, they can still recognize you despite any drawings or glasses. This is because the human eye and brain possess the most advanced and accurate facial recognition algorithm known to us.

Because the highly sophisticated facial recognition algorithm present in the human eye and brain is a product of millions of years of evolution.

Now the problem with that the algorithm is amazing but its slow to change.

While we possess remarkably advanced algorithms in the way we think and behave, it is important to acknowledge that these algorithms are still predominantly shaped for the environment of our ancestors.

When examining the timeline, it becomes evident that the first civilization emerged a mere 5,000 years ago, and industrialization began just 200 years ago.

The current scenario of working from home in front of a computer is an exceedingly recent development.

The challenge lies in the fact that we currently find ourselves in a new environment, one without the constant threat of tigers chasing us, where we have access to comfortable beds, abundant food in the kitchen, and social security.

However, despite this shift in our environment, we still possess the same genes, emotions, and behavioral patterns as our ancestors who lived in vastly different circumstances.

When engaging in trading, the concept of money comes into play, symbolizing shelter, food, and the ability to provide for oneself and reproduce.

Interestingly, the same primal emotions and fears that our ancestors experienced when lacking sufficient food or being pursued by a tiger can be triggered when dealing with large sums of money in trading scenarios. because money is everything

When engaging in trading, the emotions and responses we experience are akin to those felt by individuals in ancient times. This similarity is evident in the activation of our fight or flight responses and the manifestation of biases that helped our ancestors navigate their survival in that environment.

Conclusion

Due to the disparity between our current environment and the one our brain is wired for, most individuals struggle with trading.

Our brain is not naturally adapted to the demands of trading or the sedentary nature of sitting at a desk for extended periods, gazing at a screen.

When faced with financial gains or losses, which can be perceived as jeopardizing our access to food and shelter, it becomes challenging to maintain rationality and logical thinking.

We have inherited certain biases from our ancestors that have become ingrained within us, and we find ourselves somewhat stuck with these biases.

Challenging the influence of our genes and ingrained instincts can be extremely difficult. However, once we commit ourselves to learning new ways of behaving in the face of different circumstances and witness the benefits and profits that can result from such changes, the process of transformation becomes easier.

In order to initiate a change, it is essential to have self-trust and the willingness to go against our instincts and initial feelings. By taking that initial step and witnessing the positive outcomes, it becomes easier to embrace and sustain the process of change.

Regardless of whether you agree or disagree with this theory, it offers some insight into the existence of our biases and why we possess them. These biases persist within us, independent of our personal opinions or beliefs regarding the theory.

Check this article from Harvard Business Review by Nigel Nicholson