Why Do We Insist On Losing Positions? Discover The Economic Psychology Behind Trading Decisions.

If you are a trader and have found yourself sticking to a losing position even when all the signs point to the contrary, know that you are not alone. This behavior is more common than it seems, and the answer may lie in the way our minds work.

Confirmation Bias: The Need to Be Right

One of the main reasons we persist in losing positions is confirmation bias. This bias leads us to seek information that confirms our beliefs and ignore information that contradicts them. When we are in a position that is not performing well, our desire to be right makes us look for justifications that convince us that a recovery is near, even when objective data suggests otherwise.

Other Relevant Biases

In addition to confirmation bias, other cognitive biases can influence your trading decisions:

• Anchoring Bias: When you fixate on the first piece of information received (such as the purchase price of an asset) and do not adjust your evaluation even in the face of new evidence.
• Endowment Effect: The tendency to value more highly what we already own. This can cause you to hold onto a falling asset because emotionally you already consider it part of your portfolio.
• Loss Aversion: The fear of realizing a loss can be so strong that you prefer to stick with a losing position, hoping it will recover, rather than accept the loss and move on.

Emotionally, It’s Hard to Admit Mistakes

Besides cognitive biases, our emotions play a significant role. Admitting that a position was a mistake can be painful and threaten our self-esteem. Often, we stay in losing positions to avoid this emotional pain, hoping the market will turn in our favor and "prove" that we were right from the start.

Reflection and Next Steps

Recognizing that these biases and emotions influence your decisions is the first step to change. Here are some reflections and insights to help you make more conscious decisions:

• Honest Self-Assessment: Ask yourself if you are maintaining a position because you objectively believe it is the best choice, or if you are stuck in confirmation bias.
• Diversification of Sources: Seek opinions and analyses from different sources, especially those that contradict your current view. This can help balance your confirmation bias.
• Acceptance of Loss: Learning to accept small losses as part of the process can be liberating and essential to avoid larger losses in the future.
• Emotional Management: Develop techniques to deal with stress and anxiety, such as mindfulness or meditation, to maintain calm and clarity in your trading decisions.

Seeking the help of an economic psychology professional can be a transformative step. I can help you better understand these behavioral patterns and develop strategies to make more rational and balanced decisions. Together, we can work to ensure your trading choices are more aligned with your financial goals and emotional well-being. Let’s transform your relationship with the market and make every decision a step towards a more secure and satisfying future.