All That Glitters Is Not Gold


17 ratings



Bill Provenzano

11 Mar, 2010

in Getting Started and 1 more

My wife and I are Olympic junkies. There are only a couple of television shows that we will watch together during the week. But when the Olympics are on, there is a lot of family TV time.

Having played hockey in my youth, I was of course glued to the TV for the menís USA vs. Canada gold medal hockey game.

The game was as spectacular as we all hoped it would be; clean checking, great play-making, fast action. What more could you ask for? Well, I suppose I could have asked for the US to score in overtime to win the game. But Canada did seem to out-play the US just a bit, so I was not terribly surprised at the outcome. Nor was I terribly surprised at the look of despondency on the US playersí faces as they received their silver medals. The fact that they were not expected to make it as far as they did into the medal round did not bring them any sense of comfort. "Being one of the best in the world can mean little if it is coded not as a triumph over many, but as a loss to one. Being second best may not be as gratifying as perhaps it should" (Medvec, Victoria Husted. Madey, Scott F., Gilovich, Thomas. When Less is More; Counterfactual Thinking and Satisfaction Among Olympic Medalists; Journal of Personality and Social Psychology, 1995, Vol 69, No. 4, 603-610). Team USA was playing for gold, not silver.

Tarnished Silver
In the moments immediately after the game, many of the players on the US hockey team were likely experiencing what psychologists call "counterfactual thinking". Counterfactual thinking is the ruminations we go through and the subsequent dejection we experience when we think about what might have been had we chosen a different path or a different course of action. Perhaps some of the US players were thinking about a missed scoring opportunity during the game that would have changed the outcome. "If only I kept my shot low it would have gone in." Thoughts like these are an expression of counterfactual thinking.

Studies have been done in an attempt to quantify the satisfaction of Olympic medal winners. It is no surprise that gold medal winners felt the most joy and satisfaction. However, bronze medal winners expressed a significantly greater amount of joy and satisfaction than did silver medal winners. The medal ceremony at the conclusion of the USA/Canada menís hockey game demonstrated this clearly. Silver medal winners experience the negative perspective of counterfactual thinking, i.e., "If only we did such-and-such we could have won the gold". Bronze medal winners, however, think in terms that demonstrate the flip-side to counterfactual thinking. Instead of, "Why didnít I..." or "If only...", they think, "Good thing I did such and such, otherwise I would not have gotten a medal."

In trading we call this the "shoulda-woulda-coulda" thinking, as in, "I shoulda-woulda-coulda" got long there!" As traders we engage in counterfactual thinking many times during any given trading day to the detriment of our mental health.

Most people only get a handful of really good opportunities in their lifetime to make a handsome profit. Maybe Uncle Ned asked you to invest in his startup company. But you passed on it and then watched as Uncle Ned took his company public and made a fortune. Or maybe you ran into a former colleague of yours who climbed the corporate ladder much more quickly than you when he took another job at a different firm. "I was more qualified than him. If only I tried for that job." When we review these past decisions in light of now known outcomes, we engage in counterfactual thinking. And this counterfactual thinking can produce deep feelings of despair and disheartenment.

There was a guy who used to trade in the same pit as me at the CME, the Eurodollar pit. His name was Phil. Phil existed on a steady diet of cigarettes and cherry Lifesavers. I never saw the man eat a meal. Phil stood smashed, chest to back, between two very active traders. Phil rarely raised his arms or his voice to bid or offer the market. Instead, he seemed compelled to announce in a tone that rivaled Eeyore, the dismally gloomy friend of Whinnie the Pooh, "There goes another missed opportunity" every time a good trade passed him by. If it wasnít for counterintuitive thinking, I donít think Phil was capable of any thought at all.

As it relates to trading, we think far more frequently in negative "If only I would have ..." counterfactual terms such as, "If only I got long there..." or, "If only the market didnít stop me out before rallying..." instead of from the positive perspective of, "Wow, good thing I left my sell order where I did. Otherwise I would not have gotten filled." The conclusions from the studies of psychologists Kahneman and Tversky, which include "Prospect Theory; An analysis of decision under risk" help to explain why we are prone to think in negative counterfactual terms rather than in the positive.

Kahneman and Tverski studies suggest that the impact we experience from a loss (which, here, we are also including a missed opportunity) is twice as psychologically powerful as that from a gain. In addition, "Regret Theory" identifies that regret exaggerates our irrational behavior and response to loss (or a missed opportunity). Since the psychological pain and regret we experience from a loss (or from a missed gain) is more powerful that the psychological "high" we experience from a gain (or from a minimized loss), we tend to express counterfactual thinking in terms of missed opportunities (negative) rather than captured ones (positive).

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