Psychology suggests that “the more you oppose something, the faster it has chances to make it”
This forms the basis of the famous stock market indicator called the fear-greed index. You should be fearful when the market is greedy and vice versa. But this often remains very simple from a user perspective but this has a lot more of a role to play within our brains.
The human brain hates being sidelined and suppressed. The more a group (or) community is rejected the more they will develop hatred. In money the hatred is biased. The bulls hate the bears and the bears hate the bulls. The more the bulls are controlling the market the bears try to take them into control. We can technically call this phenomenon the demand-supply zones.
The Ventromedial Prefrontal Cortex (vmPFC) is a part of our brain that plays a major role in emotional response to fear and risk. Thus this part of the brain is active during investing. I’ve never experienced this in algorithmic trading but since the AIs are developed by programmers who possess these capabilities so we’re not opted out of that possible scenarios.
Since social media boosts and throws information at a rate faster than ever experienced by our brain before, this specific part of the brain is used much more than ever. It has been noted that a patient with vmPFC damage, threw away all his savings on foolish investments and failed to make appropriate decisions.
Everyone loses money in investing, does that mean everyone is affected with vmPFC damage. Certainly not.
Here is the thing with our brain, the vmPFC doesn’t operate on its own. All we investors have some “core values that are deeply held within our subconsciousness”.
For eg., my sacred values in investing are “I don’t lose more than 5% of the money“, if I lose more than 5% then I would get an urge to sell or act randomly. This emotion often connects me with a group of individuals in the same society. There would be a group of people whose core values might resonate with mine.
Until these core values are threatened our brain processes this information differently but then when we see these values are being threatened the self-control and deliberation region of our brain becomes ineffective and the region that incorporates emotional and social judgment stays on which is none other than the vmPFC. This leads us to take inappropriate decisions at critical levels.
We all would’ve read this at some part of our investor lifestyle, never let emotions enter your trading/investing business. Well, this part is not fully explained, we cannot control our emotions in fractions of minutes/seconds when we see our investments dwindling. Instead, this should be restructured like we should have strong core values for investing.
Before making an investment, if you made up your mind that you’ll sit cool unless you lose 90% of your capital and you believe that it’s recoverable then that will keep our vmPFC less influential in our decision making on investing.
The current bull run of the market is a fact of this, people lost their ability to think because their core values about investing are shattered by the continuous rising of stock prices that let them make decisions that are not considered logical. They act upon their vmPFC rather than being self-controlled.
The same happened with the NFT market, the stock market, the crypto market, the commodities market, and so on.
Social Media leverages vmPFC
The key part of investing is to understand the general trend of the market. We use many indicators like technical analysis, chart analysis, company report analysis, and more. There are also psychological indicators like the greed-fear index and volatility index.
So psychologically, if we can decode the minds of other people then we could master investing. The core values that we build on ourselves and understanding the core values of people play a major role.
When fewer people believe the prices of $BTC(Bitcoin) would reach $1M then the more the chances it would reach there. The people who didn't believe $BTC would reach $1M will never believe the same in one single day. It’ll take them a few baby steps to reach such levels. Thus the market moves sideways during those times. When the market breakout - it’s cause someone believed in someone else’s core values. After some time someone who believed the movement might have reached their levels and then the market stabilizes before the next movement.
The market is a psychological drive between believers and non-believers.
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