Have you ever found yourself dwelling on an insult or fixating on something in a negative way? Criticisms often have a greater impact than compliments and bad news frequently draws more attention than good. The reason for this is that negative events have a greater impact on our brains than positive ones. Psychologists refer to this as the negative bias (also called the negativity bias), and it can have a powerful effect on your behavior, relationships and your trading decisions.
What Is the Negativity Bias?
The negativity bias is the tendency for humans to pay more attention, or give more weight to negative experiences over neutral or positive ones. Even when negative experiences are inconsequential, humans tend to focus on the negative and dwell on these events. Trading losses and missed opportunities are 2 that spring to mind.
As humans, we tend to:
- Remember traumatic experiences better than positive ones
- Recall insults better than praise
- React more strongly to negative stimuli
- Think about negative things more frequently than positive ones
- Respond more strongly to negative events than equally positive ones
The Brain’s Response
Neuroscientific evidence has shown that we are wired as humans so that we have 500% more neurons dedicated towards the negative vs. the positive. That has to do with survival as negative things were threatening our existence, so we’ve dedicated more brain power for those things. Whereas, positive things don’t threaten us so we don’t have as much wiring dedicated towards noticing them.
Our brain has optical nerves that transmit visual information to our brain and then they get translated. We have on average about 1-1.5 million optical nerve fibers in our brain. And yet with 86 billion neural cells in our brain, those 1-1.5 million nerve fibers, when we are processing visual information, occupies or activates about half of our cerebral cortex. That means approximately .002% of the cells in our brain will activate about 1/3 of our entire brain when we are processing visual information. Of all the data we take in through our senses about 70% of it is visual data. This is where the statement “seeing is believing” comes from.
As traders we will have a natural bias towards trading and training based upon what we see. This by itself isn’t a problem, but because it’s skewed to one side it causes us to ignore the other half of the equation which is what we don’t see. You have to train what you don’t see as much as what you do see!
Our thoughts, emotions, our inner voice, our communication and ideas are all things that we don’t see, and they have as much if not more impact than what we actually see. Your mind is constantly interpreting all of your experiences, and if left to its own devices, the negativity bias will simply take over.
Decision-Making
The negative bias can surely have an influence on the decision-making process. Research has proven that when making decisions, people consistently place greater weight on negative aspects of an event than they do on positive ones.
Especially when it comes to risk taking, this tendency to overemphasize the negative can have a catastrophic impact on the choices we make as traders.
When imagining scenarios involving either gaining a certain amount of money or losing the same amount of money, the risk of loss tends to loom larger in trader’s minds. They often fear the consequences of the negative outcome more than they desire the potential positive gains, even when the two possibilities are equivalent.
We have seen it time and time again as traders, having a stronger negative reaction, ditch their trading plans in favor of not losing on a trade or preserving a tiny profit, in order to alleviate the pain being caused by their negativity biases
How to Overcome Negative Bias
The negativity bias can take a toll on your mental health. It can cause you to dwell on dark thoughts, hurt your relationships with loved ones, and make it difficult to maintain an optimistic outlook on your life. As a trader, this is the most difficult hurdle to overcome. Fortunately, there are steps you can take to change your thinking and fight the tendency toward negative thinking.
In order to maintain a healthy balance between positive and negative feelings, research shows that it is necessary to maintain at least a 5-1 ratio of positive over negative. Even if the positive event is huge like a birthday bash, it will do little to override the tilt to negativity. It takes frequent small positive experiences to tip the scales towards happiness.
Your mind is intermingling and interpenetrating all of your experiences.
It’s always there. That also means that your thoughts, your emotions, your conditioning, your limiting beliefs are always involved in your experience, and that particularly goes for when you are trading. And there is nothing you can do about it. It’s ok, as long as you are training what you don’t see as much as what you do see.
What can we work on in terms of what we don’t see?
Control Negative Self-Talk
In sports, athletes are out on the field with their team. They are involved in a lot of external communication, language and verbalization that is either directed at oneself or at others. There is both going on. But we as traders sitting in front of our screens only have ourselves to talk to internally. Well, if you aren’t a member of Crush Pro Trading that is.
We need to be really focused on our internal self talk, the language and thoughts that we have while we are trading, particularly when we are referencing ourselves and our thoughts, our skills and our abilities, our doubts, our fears. When it comes to all of these things, our internal self talk is critically important.
The thing we need to be extra sensitive about our internal conversation is this natural negativity bias that we have. It isn’t a problem when it comes to our survival, but when it comes to trading it has a huge impact on how we perform.
For example, you are in a winning trade and you are up over a 100 pips. It is moving in your direction and you are feeling really good about it. All of a sudden it starts to pull back. Then it pulls back a little bit more.
You will notice that your thoughts on the market pulling back just a little bit in comparison to the farthest point your trade had reached, has a much more threatening feeling to you than every pip that goes in your favor. Every pip against your position creates more neural activity than every pip it goes for you. That is the negativity bias at play.
It might not seem like a big issue, but why would you want it to be your internal experience. Why do you think that would work in terms of your self image?
It doesn’t, but that is where you reinforce and kind of weaponize this negativity bias against yourself. What can you do about it?
Exercise Your Brain
Here is a simple exercise that is very easy to do, and we can discuss how it goes afterwards.
What we want you to do is when you are trading, from the time you sit down until the time you get up, just watch and be aware of your internal language. Particularly when you are in a trade or you are about to make a trade, or the trade is progressing towards your profit or moving towards your stop loss. Keep a journal to help you acknowledge what is going on and be conscious about it.
Just be extra aware and sensitive to your internal thoughts and language. If you notice that your thoughts are starting to go negative, you are going to stop for a second and internally say to yourself,
“Hey, not going negative.”
Then take a deep breath and go right back to what you were doing. Focus on what you need to focus on, execute what you need to execute, do whatever it is you need to do. And if the negative thoughts come back again, internally say to yourself,
“Hey, not going negative.”
Then take a deep breath and go right back to what you were doing.
Try that for a week, and just see what your experience and what your process is, and just notice if your language or experience with trading is different. Are you feeling less afraid about pulling the trigger now? Are you experiencing less emotion? Is there less negativity when you internally talk to yourself? Is there a reduction in some of those kind of intense emotions or negative experiences we have while trading. Just see if that changes, and if it does then you are on the right track. Then you are doing something that is having a measurable effect upon your cognition, your thoughts, your process, and that will influence what you see.
Bonus Homework
Observe your verbal external language towards people, relationships, coworkers, significant others, trading mentors etc, and anytime you notice that your language is going negative, stop for a second as soon as you notice it, take a short breath and internally say to yourself,
“Hey, not going negative.”
And then try to re-communicate what you were trying to say without the negative language or connotation behind it.
I’m not saying that you don’t notice these things. What I am saying is just be aware of how you use your language and try and re-frame it in such a way that doesn’t have this negativity bias.
This way we are not re-enforcing something that is weaponizing this neurological bias against ourselves. We don’t just want to see other things in our lives negatively. It’s not a healthy way to live, it’s not a healthy way to relate, it’s not a healthy way to communicate, and it’s not a healthy way to be towards ourselves, especially when it comes to the trading process.
Book Recommendation
“The Hour Between Dog and Wolf”
By John Coates
A successful Wall Street trader turned neuroscientist reveals how risk taking and stress transform our body chemistry. It is a wonderful read and John Coates perfectly combines the financial market with our biology. By understanding the insights in the book, you will be able to look at your body and brain differently, and then, navigate yourself in the modern world more effectively.
Along with Mark Douglas we strongly recommend you adding this one to your library as well.