The 'Chimp Paradox' and 'Trading': A metaphor for the workings of the trader's mind.

The Chimp Paradox, written by Steve Peters a leading UK sports psychologist, is an analogy based on simple metaphor for the batttle between the rational and emotional aspects of our minds and the interplay between them which underscores virtually every aspect of our lives.

The Chimp Paradox, is not a scientific theory in any way, rather it helps a person make sense of how our emotional/intuitive mind affects and impacts our decision-making capabilities.
The ‘Chimp Paradox’ metaphor describes the brain as working in two modes, the chimp and the human mode. The chimp mode (inner chimp) is the area of the brain driven by feeling, sensing, impressions, emotional thinking and gut instincts. The chimp is intuitive, makes snap judgments, thinks in black and white, and is capable of being paranoid, irrational and emotive. Its primary motivator is survival. On the other hand, the human part of the brain is rational, evidence-based, thinks in shades of grey, and operates on balanced judgement. The human part of the brain is driven by having a greater purpose in life rather than the pure survival instincts of the chimp. There is a third aspect to the metaphor, the computer within our brain. This computer, which had an empty hard drive at birth, is only as good as the information it contains and is limited by its operating system and hardware. The computer contains stored beliefs, some of which are positive, some negative, some deeply hard-wired and tough to change, and others easier to re-programme. Our personalities are formed by a combination of the chimp, the human and the computer, which both the chimp and the human refer to as their resource for their own respective reference points: All together they dictate how we think, feel, act and behave.

Given the chimps emotionally driven nature, the assumption would be that it is far better for the inner human to be in charge at all times. However life is not that simple, we cannot simply ignore or turn off our 'inner chimp'. This inner chimp is part of our nature, and as in real life, the chimp is far stronger than the human: You want to take on a chimp on in a fight? Forget it!! A chimp has 5 times the strength of the average human, so don’t even think of challenging him. Not only is the chimp far stronger, he has far more staying power, thus as the human starts to tire relatively quickly, so the chimp, who requires a lot less energy to function, starts to take control. In reality we function by being in a constant interplay between the two, rather like a hybrid car switching between battery and oil/gasoline. However, as mentioned, there will be times when our inner chimp, far stronger than our inner human, will takeover. At these times, where we are not switched on, tired, bored, or disengaged, our mind will be effectively hijacked. (Most people will be familiar with the term 'emotional hijack'). When this happens, the chimp can run riot, and the consequnces can be hugely destructive. The art of mind management is thus the ability to better understand your mind, including the inner chimp, the inner human, and how to keep the two in balance. It is when kept in balance and in check, that more  effective decision-making and greater performance comes to the fore. It is by keeping the inner chimp calm, that you can do better work. If you fight him you will lose, and you cannot get rid of him nor fully control him. What is even better though is to be able to work with him, make the inner chimp your ally. Examples are when you work in a 'state of flow'. I am sure you can recognise times in your lives or work, when you you achieved great things almost effortlessly, that is a wonderful example of the your inner human and inner chim working in harmony. This ultimately is the 'Paradox'; your inner chimp has the power to be highly destructive, sabotaging your best efforts and underming your goals and ambitions, or he can be a great source or power, helping you achieve great things, sometimes against all odds.

It is on the back of this metaphor that one can draw upon the success of outstanding performers in many fields, including trading and investment. Master performers learn to tame their inner chimp and work with it in practical ways to harness its enormous power’s of intuition, creativity and emotional strength. When combining the power of the chimp, and the logic and resourcefullness of the human, great things can be achieved. However, when fighting the inner chimp, surrendering to his simplistic ways, or attempting to placate him, we can undermine our own develpment and growth, with the consequnce that all our efforts are below that which we are capable of. 

How does this play out in the financial markets, where belief in the superiority of rationality and logic reign supreme?

We have been carrying out some fascinating research into the proclivities and behaviours of successful risk-takers. Our work is based around a number of banks and hedge funds where we coach traders and portfolio managers. The research is on-going and still its in early days, however we are seeing some clear trends emerging which may surprise some people’s expectations of traits and characteristics needed for success in financial markets. (We recently presented our initial work on trader personality as part of a webinar which can be seen here).

One of the aspects of our personality research we are seeing is a close correlation between success in volatile markets, and a tendency to favour emotional cues over rationality and logic, particularly when one is trading shorter-term time-frames. Perhaps this is not overly surprising when one links this to the ‘Chimp Paradox’. In fast volatile markets, the ability to make money relies strongly on an on ability to react fast to new news and seemingly irrational price action. Allying the human rational perspectives; a definitive trading plan with strict money management, with the chimps extraordinary sensing and intuitives abilities, enables individuals with these skills to thrive in short-term fast markets. However, allowing the inner chimp to run wild and take control, can undermine all the good work the inner human is capable of. - Have you ever wondered after a trading day, 'why the hell you did what you did?'. Well that was your inner human, questioning his actions, whilst not conscious or aware, that it was your inner chimp who temporarily was at the controls. Furthermore, your inner human will be trying to rationalise what you did and why you did it. In the end, in a desparate attempt to resolve this puzzle and to maintain his sense of worth (protecting his ego), the inner human will attempt to explain it away as an anomoly or an outlier in your behaviour. (He will be attempting to resolve a 'Cognitive Dissonance'). And thus, any learning which could have occurred as a result of that particular episode will likely be lost, and so you will be doomed to repeat the mistake in a repeating, self-serving behavioural loop.

It is only by mastering our minds and how we use them that we can really start to change, grow and breakout out to a higher level of performance. Relying solely on intellect, intelligence and rational perspective, can only get one so far. Learning successful interplay between our intuitive/emotional abilities and our rational/logical faculties is the key to surviving and thriving. Our recent interview with Brady Dahl, author of Momo Traders, revealed how these masters of fast markets are able to survive and thrive, often against tremendous odds. The traders featured in Momo Traders are masters of the art of allying their inner chimp with their inner human. In the coaching work we do with traders and investment professionals, this theme of mind management is one of the building blocks to how we help traders power their trading to be more productive and effective. The result of which has led to some quite extraordinary outcomes, as featured in the article 'The Extraordinary Return from Investing in Coaching for Professional Traders'. 

To know more about the chimp paradox, Steve Peters provides an excellent Ted talk on his 'Chimp Paradox' which can be seen below. The full title of his book is 'The Chimp Paradox: The Acclaimed Mind Management Programme to Help You Achieve Success, Confidence and Happiness'.

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The 'Behavioural Trading' blog is written and managed by leading Trading Performance and Behavioural Trading Coach Steven Goldstein. Steven is Managing Director at Alpha R Cubed, who work with banks, hedge funds and investment firms to help them improve their people's capabilities  within their frontline financial risk businesses. To know more about Alpha R Cubed, visit their website or email Steven at Follow Steven directly on Twitter.

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