Blog, Psychological Analysis

Fear Conditioning & Psychological Damage


This article touches on two important areas market participants face when trading/investing: Fear Conditioning & Psychological Damage. The good news is that you can change your conditioning and overcome your psychological market related damage. It requires a lot of knowledge, time, patience, hard work, and practice. While you read this article- think about how you are conditioned and what psychological market related damage you suffer from (most common are: how things went wrong for you in the market or your past losing experiences). Once identified, more importantly, do you want to change/overcome them?

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Fear Conditioning

The circuitry of the fear response may have been honed by evolution, but there is also another side to fear: conditioning. Conditioning is why some people fear dogs as if they were fire-breathing monsters, while others consider them part of the family.
In the 1920s, in what is probably not one of psychology’s finest moments, American psychologist John Watson taught an infant to fear white rats. “Little Albert” had no fear of the laboratory’s test animals. He showed joy at the sight of the white rats especially and always reached out for them. Watson and his assistant taught Albert to be terrified of white rats. They used Pavlovian (classical) conditioning, pairing a neutral stimulus (the rat) with a negative effect. Whenever Albert reached for one of the rats, they created a terrifyingly loud noise right behind the 11-month-old child. Not only did Albert very quickly learn to fear the white rats, crying and moving away whenever he saw one, but he also started to cry in the presence of other furry animals and a Santa Claus mask with a white beard.
Like Little Albert’s fear of white rats, a person’s fear of dogs is most likely a conditioned response. Perhaps he was bitten by a dog when he was three years old. Twenty years later, the person’s brain (the amygdala in particular) still associates the sight of a dog with the pain of a bite. We’ll take a closer look at some common fears in the next section.

Psychological Damage

Successful traders/investors have learned how to over come their psychological market-related damage. Remember we all started somewhere and during our journey we have all paid our market “tuition” in some way shape or form. As a result, we have accumulated a certain amount of psychological damage along the way. How do you handle losses? Do you take them personally? Do you get upset or angry when you lose money? The list goes on and on but there are two key questions to ask yourself: 1. Are you aware of your psychological damage? and 2. Do you want to repair the damage? The first secret is to define your Psychological Damage and then work on repairing it. This is best done by separating your emotions/ego from your results and do not let trading define you. It doesn’t.

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