Why Investors and Traders Fail

It's fine to celebrate success but it is more important to heed the lessons of failure. 
Bill Gates

Those of you, like I, who have been around the markets for many years have seen seemingly good traders all of a sudden self-destruct. They normally buy 10 contracts (futures, options etc.) and today they bought 100 or they normally buy 100 shares and today it was 1,000. When asked why, they usually respond I don't know, I just did. I have personally seen it many times, an individual taking a position much larger than normal and not warranted under any circumstance. I call it "the big idea", the one that will finally set me free. What causes an otherwise good trader, to one day just violate all his rules and then repeat that same mistake time and again without ever learning? The root of the problem is almost always some form of self-deception and rationalization. 

"Under periods of inner stress…a person may become alienated from his real self. He will then shift the major part of his energies to the task of molding himself, by a rigid system of inner dictates, into a being of absolute perfection. For nothing short of godlike perfection can fulfill his idealized image of himself and satisfy his pride in the exalted attributes that he has, could have, or should have." Dr. Karen Horney (1885-1952) Neurosis and Human Growth).

The result is an ever-widening system of falsehood and evasions that take people further and further away from being able to identify and live with the truth. Therefore in the example above most often you will find they failed to ask themselves a vital question: what happens if I am wrong--very wrong? In other words, they badly misjudged or even failed to consider the risks inherent in their decisions.

People base their decisions on perceptions as well as facts. They interpret facts and put them in context. Those interpretations and contexts are based on the decision-makers' belief systems, and psychological attitudes. The best way of finding these things out is to ask a series of probing questions. When making decisions ask yourself are you: analytical and quantitative i.e. an engineer or scientist, for example? Or are you intuitive and qualitative i.e. philosophers or psychologists? Are you an optimist or pessimist? Are you a systematic thinker, always looking at the interactions of units, or more linear, following events in sequence? Do you have any political bias? Do you see lurking conspiracies or do you accept the logic of historical accidents? Do your own ambitions and biases blind you, or are you eager to learn? Are you susceptible to herd mentality? These kinds of questions help account for the idiosyncrasies of decision-makers and thus build the necessary foundations for developing good decision-making scenarios.

These subtleties often give rise to the gigantic illusion called false pride that hinders many traders. These concepts are so active in trading and in our society that understanding them will prove crucial in gaining self-awareness the first step in personal growth and change, especially for traders.