'Self-Control in Trading' and the 'Marshmallow Children'.

Marshmallow: A a light, soft, spongy sweet which typically comes in various pastel colours and shades.

Trading: The act of buying, selling and exchanging commodities and financial instruments, hopefully for a profit.

Not an obvious connection, but let me explain!

In the late 1960s, an experiment was held at a Nursery School on the campus of Stanford University. The experiment was to become one of the most well known in the field of Psychology, and was to spawn many more experiments of a similar nature.

Marshmallows, Self-Control and Delayed Gratification.

In the experiment children aged from four to six years were led into a small room, where a treat of their choice, usually a marshmallow, was placed on a table. A researcher then told them that they were going to leave the room and that they had two choices with regard to the marshmallow:
Choice 1: They could either eat the sweet soft marshmallow in front of them right away.    
Choice 2: They could wait for the researcher to return (typically some 15 minutes later) before eating the marshmallow. However if they could do that, they would then be rewarded with a second marshmallow.

The researchers observed the children as they somehow tried to avoid eating the marshmallow. Some would cover their eyes with their hands or turn around so that they could not see the marshmallow, others started kicking the desk, or playing with their hair, whilst others tried stroking the marshmallow as if it were a small animal. However most could not wait, they simply ate the marshmallow as soon as the researcher left. 

[A Wonderful YouTube video shows highlights of a reproduction of the original experiment can be seen at the end of this article.]

Of the 653 children who went through the original experiment, around seventy percent were unable to resist temptation and never received a second marshmallow. However, the other 30% were able to find a way to resist. What is really interesting however is that the benefits to those who resisted proved to be far more significant and long-lasting than just a second marshmallow!!

Around a decade later, the lead researcher in the experiment, Walter Mischel, decided to follow up on the progress of the 653 children. What he found stunned the world! Most of the children who were unable to wait for the second marshmallow had suffered behavioural problems of some sort. This included poor ability to focus, a struggle to manage their emotions, trouble dealing with stressful situations, problems maintaining relationships. However, the children who had been able to delay gratification were far more settled on all these issues. And when it came to academic performance, the only truly objective data, children who had been able to delay gratification had on average achieved S.A.T scores around 210 points higher than the children who could not delay gratification. (That’s significant considering average S.A.T scores are 1500).

But Mischel did not stop there, a further 15 years later he again checked up on the progress of the original participants, now in their thirties. Again, many of those who hadn't been able to wait for the second marshmallow, reported being unhappy with their lives. Some had problems holding down a job or regularly changed jobs, many had significant financial stress, often they reported trouble dealing with their emotions and many struggled to achieve their goals. Also a high proportion had challenges maintaining relationships, many had problems with obesity, and some reported issues with drug addiction. Once again, the children who been able to exercise the self-control were in a far better place. By comparison, they reported more fulfilling lives, their finances were either strong or under control, and they had satisfying careers and great long-lasting relationships. Furthermore, on average, they earned higher incomes, and had a far lower likelihood of having committed crime or suffering addiction problems.

Trading, Self-Control and Success.

Now back to trading, I had a career of nearly 25 years as a trader, before becoming a performance coach working with traders and fund managers. One of the most common topics which comes up in discussions with risk professionals is the matter of discipline and the inability of people to exercise self-control. The link between marshmallows and success in trading is now hopefully apparent: Learning to delay gratification; to resist temptation and not give into impulses are key factors contributing to success as a trader or investor. If you can learn to exercise self-control and to become familiar with the idea and concept of working towards delayed gratification, you should start to see improvements in your performance and the start of a journey to stronger returns. 

Baltazar Gracian: “Let the first impulse pass. Wait for the second.” -  Not however as simple as it sounds. 

I admit, that as a former trader myself, it felt good to sometimes 'go with the flow', ‘to live for the moment’, to 'jump on an idea' or 'be swept away with the crowd'. Sometimes it would work, but all too often those trades were the rotten ones. These were trades that may have felt good at the time, but they were also the ones that liberated me from my money. A lack of planning, structure or self-control are not healthy philosophies for life, nor a good recipe for success. They leave you vulnerable, exposed and lacking direction. It is at these times that you are most likely to fall victim to unconscious biases, to give into emotionally driven decisions, or to let your ego trample all over your trading.

Of the many successful traders I have worked with or coached, none of them based their philosophy on leaving matters to chance. This does not mean they could not trade ‘from the seat of their pants’, in a world of heightened uncertainty and extreme volatility, this was often required. But underlying this was preparation, method and  structure. I have carried out extensive research into the personality traits of successful traders, a subject I will be discussing at up and coming webinars (Click here for more details of these). Within what may appear to be a random process for many risk professionals, there is often a rigorous method, approach and structure which underlie their success. This helps them maintain far more self-control than at first seems present. A recent article I published highlighted the extraordinary results which can result from performance coaching for risk professionals (See here). In many of the examples featured in the article, gaining better self-control was a significant factor involved in the performance improvements.  

In these challenging markets, with increased volatility, self-control is more important than ever. - 'You cannot control the market, but you can gain better control over yourself.'

This video-clip shows highlights of a reproduction of the original Stamford experiment.

Steven Goldstein is a leading Performance Coach working with Traders, Banks and Hedge funds at AlphaRCubed Ltd: To know more about Alpha R Cubed, visit their website www.alpharcubed.com or email Steven at steven.goldstein@alpharcubed.com. To view a brochure on their work click the link here. To subscribe to their monthly newsletter, email info@alpharcubed.com, and request brochure and or newsletter.

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