Marshmallows And Your Trading Discipline

Excerpt from my April 2010 newsletter:

 When I was speaking at the Australian Stock Report's VIP Trader’s Conference most traders had the same reason for consistently losing money: “Mandi, I know how to trade, but I am just not disciplined. I am impulsive, compulsive and impatient I should know better than that. I just don’t know what to do!”

And I hear that complaint everywhere, people can't lose weight, they find it hard to get out of bad relationships, they are stuck glued in front of the TV.

Well, the answer to that dilemma lies in the humble Marshmallow. You will be surprised what Marshmallows can tell you about your trading performance.

Studies show that self-discipline is a far stronger predictor to success than intelligence. And this is especially evident in the business of trading as there are only 2 reasons for failing: 1) trader doesn’t know their craft, 2) trader knows how to trade but fails in self-discipline of doing what they know to do.

In the 1960s, Walter Mischel at Stanford University conducted a classic study into self-discipline called the Marshmallow Experiment. A group of four-year olds were given a marshmallow and promised another piece, only if they could wait 10 minutes before eating the first one (delayed gratification). But most ate their marshmallow as soon as they were left alone with it, only a few were able to resist temptation pretty much like those unsuccessful traders.

Here is a great Youtube video of the test and I wonder if you recognise yourself in some of those kids...

The researchers then followed the progress of each child into adolescence, and the results were astounding! Teaching the ability to say NO to oneself, to delay gratification and control emotional impulses created young adults who were better adjusted, more dependable, did better at school, it had an impact on their happiness, even their popularity, they had lower divorce rates and a higher success rate later in life. The ability to resist eating the marshmallow was an astounding indicator.

So, what was the difference? Why was one child able to resist whilst the other quickly gave into the marshmallow indulgence? Why is one trader able to easily do what it takes whilst the other one just falls pray to their emotions?

Well, the child that could resist simply had a better strategy at managing self-discipline, at controlling their urges. For example they would do anything they could so they wouldn’t look at the marshmallow. Staring at the ceiling for 10 min, marching around the room, sing from the top of their lungs so they wouldn’t think about it. Whereas the children who didn’t show any self-discipline stared at the marshmallow, touched it, played with it, tasted it... their whole focus was on that sweet temptation.

There are a few more interesting conclusions that came out of this experiment. Those children who ate their marshmallow right away seemed to be oriented towards the present. And those who resisted temptation seemed to have an orientation towards the future.

I apply the same concept in my coaching. I have observed that traders who are oriented towards the present (‘in time’) find it much harder to deal with a loss than a trader who is a ‘through time’ person, someone who is able to think about and conceptualise time, who is very aware of the context between past, present and future. The ‘through time’ trader also seem to learn much faster from past experiences whereas the 'in time' trader seems to be more prone to repeat the same mistakes over and over again.

When the children were interviewed years later as 18 year olds, it became apparent how the quality of a person’s every day decisions are influenced by their ability to exercise self-control by saying ‘no’ to themselves, to delay gratification, control their emotional impulses and their personal time orientation as there were remarkable differences between those children who were able to delay gratification and those who couldn’t resist.

So, how do you eat your marshmallow?

 And what is is that you need to learn to do differently in order not to lose?