Consciousness in Trading
In the Book of Genesis, God places in the Garden of Eden the tree of knowledge of good and evil, and tells Adam not to eat from it for “you are sure to die”. Later, the snake tells Eve that she will not die, but rather that “God knows that your eyes will be opened as soon as you eat it, and you will be like God, knowing both good and evil.” Convinced, Eve took some of the fruit and ate it together with her husband Adam.
What is Consciousness?
We humans may be biologically similar to animals, but there is one thing that sets us apart from them: the fact that we are conscious.
Consciousness, at its simplest, is awareness of internal and external existence. — Wikipedia.
Animals are not aware of themselves nor the world they inhabit. They follow their instincts to survive, with no realization of what they are actually doing. Once upon a time, man was animal. He hunted and he gathered in order to survive. Slowly but surely, man became conscious. Although this development remains largely a mystery, it is assumed to be the result of social interaction among humans. When you start to communicate with others, you realize that there are actually other people like yourself. Once you realize this, the next step is asking yourself “who am I?” which then leads to “where am I?” followed by “what am I?” and, lastly, “why am I?” Thus, consciousness was born.
This evolution of humans becoming conscious is depicted in the Bible in Genesis 2 and 3, where Adam and Eve eat the forbidden fruit of the tree of knowledge of good and evil. If you know the difference between good and evil, you become, in a sense, like God: conscious. But, one may ask, do we really want be like God? One could argue that you get less happy the more conscious you become. After all, you will realize how many things are wrong in the world, along with your own imperfections.
So, the question lingers: “Is it better to be conscious or unconscious?”
Increased Consciousness: Good or Bad?
Nietzsche’s view
The 19th century German philosopher Friedrich Nietzsche believed that consciousness is a social construct. He was of the opinion that most of our actions are driven by unconscious instincts, which he considered integral to one’s identity. He was critical of his contemporaries who saw consciousness as the epitome of human existence. Increased consciousness, he believed, would only drive one further away from who they really were.
Jung’s view
The Swiss psychiatrist Carl Jung took a quite different view. As opposed to Nietzsche, Jung believed consciousness to be a critical part of oneself and the center of one’s identity.
Man has developed consciousness slowly and laboriously, in a process that took untold ages to reach the civilized state. And this evolution is far from complete, for large areas of the human mind are still shrouded in darkness. — Carl Jung: Man and his Symbols.
Jung believed that man should aim to become a single, homogeneous being by means of a process he called individuation, which involves integrating parts of the unconscious into the conscious. Many problems, so he posited, similar to Nietzsche, arose from the unconscious and conscious not being in harmony. However, rather than discarding consciousness altogether, Jung believed that the solution lay in examining and understanding the unconscious and then integrating it into consciousness.
Consciousness in Trading
Up until here, we have discussed a lot of psychology and philosophy, and I can hear you think “How does this all apply to trading?” For that, we’ll start with the original idea that got me down this rabbit hole, which I tweeted some time ago:
This idea seems to be in line with Jung’s view on consciousness, though here it applies to trading rather than one’s own well-being. The idea is that, to become a better trader, one has to become more conscious, both of their own emotions and shortcomings (let’s call this internal consciousness), and of that of the market as a whole (external consciousness).
Internal consciousness
In trading, internal consciousness helps protect one from emotional trading. One way of doing this is by becoming aware of your cognitive biases. These biases were originally features, but time has decayed them into flaws. One example is the loss aversion bias. For our ancestors to survive, they had to protect their resources (food). Losing food could prove to be fatal. So, our brains evolved to, unconsciously, put more weight on losses proportional to gains.
If we want to become better traders, we must become conscious of such biases. We will never unlearn them, because they are so deeply engrained inside us, but becoming aware of our tendency to fall prey to such biases can go a long way.
External consciousness
On the other side, we have external consciousness. This is not very different from knowledge in general. It includes being aware of:
- what moves the market;
- current trend/sentiment;
- technological developments;
- regulatory developments;
- and more.
Retail traders are oftentimes unaware of these factors. Most of them only care about price; they are simple trend followers that will buy when price goes up, expecting even higher prices. This works for a while, until it doesn’t. Needless to say, most retail traders are not profitable.
In my opinion, it should be the goal of every trader to focus on improving these two areas of their consciousness.
Conclusion
“Markets transfer money from the unconscious to the conscious.” That is the idea/theory that led me to write this article. Though there are always exceptions, I believe it to be true generally speaking. To become a better trader, we have to become more conscious of (1) our own emotions and biases, and (2) the functioning of the market, most notably the behavior of its participants. And whenever something goes wrong or you make a bad trade, remember:
Conflict exists strictly as an opportunity to raise our consciousness.— Carl Jung.
