How Short-Term Gratification Impacts Trading

07/17/2014 6:00 am EST


A lot of traders give into short-term, immediate gratification to avoid suffering a loss, but Andrew Menaker, PhD of explains how this attitude may mean missing out on an even greater gain to come with long-term, delayed gratification.

What do these three actions have in common? 1) Booking profits prematurely, 2) doubling down on a loser, and 3) chasing or impulsively entering a trade.

The commonality is these three actions illustrate the difficulty of choosing between immediate gratification versus delayed gratification.

In case you’re wondering about the loss example—although you might rationalize that holding onto a loser or doubling down will result in future gratification, the psychological reality is that you are engaged in short-term gratification by avoiding the immediate discomfort of accepting the loss. You’re giving into short-term gratification at the expense of longer-term goals. There’s also the financial and psychological impact of opportunity loss holding a losing trade too long.

In a previous email newsletter, I outlined how a special form of self-confidence (what I call ‘true self-confidence) is an important underlying dynamic in discipline. The ability to delay gratification is another important dynamic.

Although there are many different ways to deal with the conflict between need for immediate versus delayed gratification, there is a common attribute I see among traders who improve in this area.

The prerequisite required to prioritize longer-term needs over shorter-term needs, in many ways, is ironic given that we trade for financial gain. Being singularly motivated by money—whether by profits or to avoid losses—is not enough of a motivation to improve performance. You also need motivation for self-development. The desire to improve, sometimes I refer to this as the growth mindset, is what I see with traders who do improve.

The ability to delay gratification comes from working on your self in ways that will develop ‘true-self confidence.’

By Andrew Menaker, PhD,

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