The REAL Reason You're So BAD At Trading | Trading Psychology

hello and welcome back to lesson two of the advanced psychology course for high performance trading this video is looking at decision Evolution how our decision and judgment systems came to be the way they are and why do they seem to make trading so hard most Traders have at some point questioned whether there's something wrong with them because they're so frustrated with their lack of success what I'd like to show you in this lesson is that there's nothing wrong with you you can succeed at trading you just need to realize your mind developed long before capitalism

or financial markets and so some of your decision systems are Mal adaptive for the trading environment in which case understanding how your mind works and learning to retrain your decision systems is the key and this video will deal with the first part of that how and why you make the decisions you make in the last video I introduced the hyper simplistic model of the brain with system one and two and how these two systems differ in their approach to making decisions system one is faster to think and act but relies on automative and instinctive reactions

system two is much slower but it's more methodical and it prefers to check everything system 2 is your self-control forward planning and general oversight system it's also a relatively recent addition to our brains develop meaning it's way more fragile and easily knocked out if you're not aware of how to use it or how to look after it without question the oldest the most powerful part of the brain is system one and given that its functioning is almost entirely unconscious it does leave us wondering exactly who is in charge of our decision- making without self-awareness self-control

and oversight system one can be running a show 24 hours a day leaving us impulsive emotional defensive and at the becking core of our most basic needs and fears not what we need when we're trading it's like trading like a chimp when system one is in control but how has this come about why does System One have such power and control over us why isn't it the logical rational and methodical system too which has more control well until relatively recently humans have existed in an unpredictable chaotic and threatening environment humans not only had to hunt

for food but were themselves liable to become lunch for another animal survival meant making rapid decisions when faced with threats do you stand and fight threes and hope you go unnoticed or run away system one is primarily designed to quickly evaluate threats and then prepare the body for a physical response people who made quick and appropriate decisions survived and they crashed on their dreams and their decision-making systems to their children as a result of that over time our brains have prioritized basic survival and reproduction Above All Else obviously it makes sense it wouldn't be able

to reproduce at all if it didn't all of your ancestors stretching back forever have put survival and reproduction before everything else therefore as we'll learn in this video your brain has developed the capacity to override slow conscious thought and it regains almost total control of your mental and physical respons is if it thinks your survival or your ability to reproduce is in question system one is online 24 hours a day and scanning for perceived threats when it's faced with uncertainty or incomplete inammation which in this picture incompletely information means low light what system one has

become incredibly good at is trying to ascertain whether it's faced with a threat or an opportunity sometimes it might be both of course or a close call but most of the time system one has learned that it is best to assume that every unknown is a threat rather than an opportunity until proven otherwise it's behaving like an over sensitive smoke detector preparing you to react at the slightest unknown stimulus it's white thights seem to erupt in bars out of nowhere alcohol has knocked out system 2 completely and system one is left standing for assumed threats

overreacting to the slightest nudge look look or comment but it makes perfect sense that threat evaluation would be over sensitive would you prefer an over or an under sensitive smoke alarm in your house putting up with the occasional false alarm from burnt toast is much more preferable to be in burnt alarm with yourself the first time the real fire breaks out you will have experienced this oversensitive threat perception at work in trading by definition we have incomplete inclination because it's impossible to know exactly what's going on behind the scenes and the non-stop stream of price

data presents unlimited opportunity and unlimited risks it's the perfect environment for system one to be on high alert and in the face of too little information and a lack of certainty it's safer for system one to assume this is a threat rather than opportunity and then you're left with fight flight or freeze now when humans are forced to fight either because the opportunity for food was critical to our Sur Al or it was an obvious physical threat against us system one concludes that it needs to throw everything out it kill or be killed historically threats

of almost all being physical ones and the only way out of a physically threatening situation is a quick decisive and extreme physical response not a slow methodical or logical one there's no time to sit down and make a plan so this next part is one of the video those first big lessons under threat system one takes more risks in a way it becomes more optimistic fancing its chances against far bigger and stronger opponents without this form of hormone induced optimism we'd simply do what sheep do and we would just sit down and wait to be

eaten by whatever it seems like an overwhelming threat this is the exact same mechanism that can be seen in sports teams when they become more optimistic about taking risks when they behind or they're on the back foot so to speak of course this strategy doesn't automatically lead to survival but those that did survive passed on their GES that prioritized extreme risk- taking and optimism in the face of extreme threats those that didn't stand and fight those that cowered or sat down to work things out logically and methodically were rooting removed from the gene pool now

system 1's approach to risk takum wasn't just shaped by physical threats humans have evolved almost entirely just above the level of subsistence meaning that we were only just a few meals away from beginning to starve so unlike today historically supplies of food have been scarce and unpredictable when food levels fell below the levels needed for our big six survival we learned that we needed to take more risks to obtain food at any cost if we were malnourished it was our only option to take more risks and go on perilous Expeditions or risk poisoning from from

an unknown plant to survive again taking risks didn't guarantee your survival but those that didn't take massive risks to find through by any means definitely did not survive they sat down and withered and they didn't reproduce so when faced with scarcity system one has learned that excessive risk-taking is its best but not guaranteed chance of survival it's also learned that in this situation long-term goals and planning are completely irrelevant the objective is to survive in the short term let's just live another day so you can see why system one functions the way it does when

you're trading if you're in a losing position or your account is in the draw D system one is going to make you take bigger risks and engage in much higher risk behavior like adding to losing positions or doubling up your position sides and when system one perceives a threat it prioritizes the immediate short term with absolutely no consideration for the future it makes you hyperfocused on the success or failure of an individual trade and you end up neglecting what would be best for your long-term success now although system 1 has learned to prioritize survival and

reproduction above everything else there's obviously more to it than that protection of itself is the highest priority but it's also concerned that you're making decisions that ensure that your mate children tribe and species overall survive it works as a kind of of constant advisor and motivator to ensure that your actions are directed towards finding a mate reproducing and then protecting your Offspring and beyond that given that humans are not the biggest or the strongest creatures on the planet we've developed highly complex social structures we've learned that we are much more likely to survive in numbers

and to form tight communities of people who we can trust and come together to defend ourselves now if you're wondering how that's got any relevance to trading let me just give you an example if you have a family that you are financially responsible for and the money that you're trading with could affect them for Better or For Worse that will impact your trading due to system 1's priority to protect those relatives and even if you don't have a family in that sense your status within a social group becomes the focus of system one telling your

friends you've just lost your hch because of a bad trade or investment is going to damage your standing within the group but showing how you just made a million dollars due to your intelligence and skill will elevate your status within the group that kind of thing matters to system one you only have to look at trading forums to see the extent to which most people spend more time defending or promoting their status rather than focusing on actually improving their trading but why well for most of our history our membership of communities and our status within

them has been a critical survival strategy surviving in communities enabled us to collect store and process more food as well as enabled us to divide up jobs so we can become more specialists in tool making hunting Child Care medicine and better shelter without secure membership of these protective communities we ran the risk of being chucked out beyond the city or the village walls to be once again exposed to the elements predators and having to be entirely responsible for our own food supp so system one prioritizes membership of a community at all costs but staying a

member of a community for protection is not as simple as given along with everybody membership requires competition within it there's always being Fe as competition for status roles and mates and by gaining status and power you decrease the likelihood that you'll be rejected and left offend for yourself take a look around you in the modern world and you can see the Deep dve people have to gain status and be respected with the in their groups and communities the pursuit of specific careers fashion appearance concern over what other people think reputation and the Quest for control

and power they are all system one's biological effects on our judgment and decision-making the need to be right and more importantly to be seen to be right is one of system 1's ways of trying to maintain our status and self-respect admitting that your wrong is very hard for this reason system one has a tendency to defend its opinions at all costs to maintain status trading is a great example of lots of smaller communities who defend their approach and their systems and their indicators and philosophies at any cost even in the face of massively overwhelming evidence

that proves that they are wrong their need to be seen to be right and remain in their selective Community is more important to their system one than updating their beliefs and ultimately becoming a better Trader that plays havoc with a Trader's mind the trouble is our brain and System One have developed in a very physical environment and our communities worked with the around as they are in its picture not haveen away on computers it was housekeeping making repairing building agriculture hunting and fighting system 1's judgment and decision-making systems are really geared towards preparing the body

for physical work for physical tasks system one has learned that more work leads to Greater output obviously the more we hunt and forage the more likelihood we will find food the harder we work in the fields the more productive the land will be the quicker we build the more shelter we can provide and the harder we fight the more likelihood is that we will conquer our opponent and when we work harder and faster System One Rewards us with addictive euphoric chemicals such as opening it is learned over Millennia that the more work you do the

more likelihood you will survive so it motivates us to push on but the modern world demands much less physical activity and puts a lot more emphasis on pure thinking such as trading the problem with that is that when we find ourselves facing a risk system one still defaults to harder and faster work equals better results and this can be a massive problem in trading if you've been in a losing Street system will automatically encourage you to work harder take more trades to dig yourself out of the hole you're in but if you're losing because you're

just not very good or your system is bad or the market is bad taking even more trades is only going to increase your losses similarly if you've been on a winning Street system one will tell you that if you've got good results doing this much work if you work twice as hard you'll get double the rewards that's obviously not true in trading the market conditions dictate the number of opportunities you have so if you increase the number of Trades you take you inevitably end up taking substandard trades and you get worse results now when looking

at these workers sap exhausted under a tree it's difficult to appreciate how the world must have looked to them we take it for granted that we understand why the sun comes up what stars are how animals and plants develop and what causes natural disasters and weather patterns to the average person even a few hundred years ago let on a thousand years ago the simplest aspects of our existence would have seemed mysterious and unexplained but actually we did make sense of it maybe not the right sense but we did make a sense of it one of

system 1's primary functions is to see patterns in the chaos and make meaning from it system one is a pattern spotting and learning engine trying to see repeating patterns and movements in animal Migration the weather the Stars human behavior and create theories and explanations for all of these patterns now while system one is exceptionally good at spotting repeating patterns we don't always understand why or how those patterns exist take animal migrations for example we might have assumed that the migration patterns were driven by Spirits rituals or the results of our own mistakes we thought that

mental and physical illnesses were punishments in response to past transgressions so although we are incredibly good at spotting patterns the patterns may be false and even for true patn we're uncomfortable with not understanding why the patterns exist if we see a pattern our systems immediately and fiercely try to explain it even in the face of incomplete information their patent recognition is obviously a key requirement in trading it's also unsurprisingly one of the things that Traders are spectacularly bad at we see false patterns everywhere and we apply meaning to them we make trading decisions based off

them and we tie ourselves in not lesson 11 of this course is dedicated to patent recognition specifically as it applies to trading so I won't go into any more detail on that bit just yet the last thing I want to consider from a historical perspective is that humans were negotiating and trading way before the introduction of money or even writing humans kept mental records of what they borrowed length bought and sold and at what costs system one has therefore developed an incredible internal mechanism for keeping records which we're going to try and explore in the

next few lessons you've experienced this capacity when someone does your favor or you lend a friend $50 for these small social transactions we don't have to keep written records we keep intuitive mental accounts of what we owe and what we are owed and this mental skill has ensure the transactions are largely fair and equal and we're not taken advantage of and most importantly it's been the mechanism by which we have cooperated towards common survival goals such as collective agriculture for instance if your farm has an excess one year you might be happy to offer the

excess to another member of the community knowing that if you have a bad year you can always fall back on those you've helped previously these mental accounts have also allowed us to swap like for like tools for corn or a day's labor for medicine it's incredibly useful in managing social relation a ships but it really wasn't designed for trading in trading system one keeps a very simplistic record of your wins and losses particularly in the short term like today or maybe this week or this month but as I keep saying trading is a probabilistic activity

where edges only balance out over the much longer term but system one doesn't really understand this because it's designed to keep shortterm generalized emotional records the next figure in this series lesson three of the course delves into that topic in much more detail I want to move on now to system 1's six main priorities I started by saying system 1 has two priorities to protect itself and to reproduce itself but as I said earlier VAR is an overs simplistic description to achieve those aims it has developed a broader set of priorities which you must understand

if you want to be able to trade effectively if you don't these will disrupt every part part of your trading there are six to be aware of the first one is to defend oneself from physical harm we've talked about that already the second is to make friends and be social the third is to maintain membership of a network or a community the fourth is to attract a reproductive mate the fifth is to keep that reproductive mate and the sixth is to ensure that your Offspring survive these are all judgment and decision circuits that are are

introduced sequentially as we grow up but they continue to function in the background as new layers are introduced in a way these are independently operating circuits of the brain with different priorities we'll refer to them as subcell from now on so let's start first by looking at how these unfold developmentally at 1 years old we're simply concerned with our own physical safety and existence being fed watered and trying to avoid physical harm from animals and siblings this physical harm sub sself Remains the most powerful circuit in system one from 2 years old we tried to

form bombs with other children we are concerned with learning how to make friends communicate and form strong bonds from about 5 years onwards our efforts extend beyond individual relationships and are directed towards memberships of groups and our status within them this is our tribe and our status Subs sself it's concerned with being a secure member of a group particularly amongst our own age group and then from approximately 12 years old the attract mates sub sself begins to stir and boys and girls start to consider not only how they're being perceived by a social group but

by potential partners and mates concern over appearance extra monitoring the behavior trying to evaluate how potential mates perceive us become a more and more powerful force which continues well into adulthood then at some point in adulthood we make may see a new sub sself the keep mates sub sself is launched in order to maintain Intimate Relationships not just acquire them and this is crucial in order to create an environment in which children might survive negotiations selflessness empathy and compromise are all strategies that this sub sself deploys to try and retain mates and create a stable

environment in which to reproduce and of course if and when children do arrive the caring for family sub sself prior izes the needs of our children we feel competitive and defensive of our own children and we become determined to give them the best schooling the best toys the best experiences and so on these sub have their own independent objectives and in adults they are running simultaneously this can create internal conflict as each sub tries to get heard comes online and offline and advises pressurizes and sometimes even hijacks our judgment and decision-making for instance the attract

mates and the keep mates Subs may come into direct conflict and there are obvious consequences for people who lack control or oversight a person lacking awareness might be victim of the tribe and Status sub sself which could dictate their whole life at the expense of them looking after their health or family or a person who feels under physical threat can be dominated by fear and paranoia at the expense of all the other subs so who is in control well the idea that the brain is the puppet master and the body does what it's told is

almost entirely false if anything it's the other way around take hunger for instance our body runs low on food it tells system one it needs food system one then sends out a powerful signal that advises if not pressurizes you to go and get some food and then system 2 has a vote on whether to act on it or not or in extreme circumstances system 2 will not be given a vote at all and you'll just be on the Rampage uncontrolled with looking for food at any cost in this case the body is the Puppet Master

System One is the motivator and system 2 is the last to get involved if at all these Subs sales are all biologically driven by the body they are triggered by hormones and in turn they act as powerful influencers that drive certain behaviors so what does all this have to do with trading well Absolut abolutely everything when real money is at stake system one and its defense mechanisms and survival instincts wake up when hormone levels are high and system 2 is weak system one will always win the tug of war in particular when it detects risks

as it would with a real money trading account these subcell have the ability to inhibit blood flow to system 2 and restrict rational thought and self-control system one can literally cut off blood supply to the very mechanism that has the power to govern it it's like a car engine having the power to cut its own braking system when you're trading these subcells exert continuous pressure on your judgment and decision-making whether you realize it or not so let's look at each one individually starting with physical harm this is what we refer to as the oversensitive smoke

alarm it triggers the fight flight or freeze response you can fight by doubling up on your risk and trying to win back the losses you can overtrade or you can take revenge trades to try and win back the losses you can run away by taking a profit early or you can freeze and do absolutely nothing as you watch the loss get bigger and bigger and don't forget that when there is a perceived risk your system one knows that taking greater risks may actually be your only or best hope so you are far more likely to

take bigger and bigger risks when you're under that threat perception the subcell for social that makes you want to be part of a tribe together with other Traders with the same beliefs as you have and you don't want to be ejected from that tribe so you can form you don't challenge the beliefs or the teachings because you don't want the rest of the group to turn on you so you just fully commit to it you see other tribes as a threat or direct competition it can make you very very close-minded and almost track you in

a way of trading using certain methods or indicators that may be completely useless or even harmful to you the status sub sself can be one of the most damaging you can view losing trades as a loss of status or a sign of weakness or your incompetence so winning trades make you look like you're right so you'll take profit early or you'll design a system that has a high win rate but a negative long-term expectancy it can make you take too much risk by doubling down on losing trades so you can win that money back and

you can hey look at me I made it all back because I'm a winner I'm not a loser it can also stop you taking any risk at all actually because you're so afraid or failure if you don't enter the trade you can't lose you can't be wrong and therefore you can't be judged it's better not to try than to try and fail attracting a mate is a funny one because this can me you take excessive risk there was an interesting experiment with teenage boys performing tricks or stunts on their skateboard when it was just the

boys evident was pretty normal but the experimenters got an attractive teenage girl to come and sit on the bench and watch them and with her present the boys started trying to take much more difficult and more dangerous stunts and basically showing off and as a result they had far more Falls and way more accidents they put themselves in a lot more danger statistically we know that teenage boys are much more likely to kill themselves doing something stupid showing off and adult males in the tradeing environment can be exactly the same and then wanting to keep

a mate the next sub sself can have a very similar effect if you're afraid of losing your partner maybe because you're having financial difficulties you may take greater risks you have something to prove and you want to impress them and show them that you've got what it takes you can provide for them but that sub sself may also do the exact opposite and induce you to take less risk to become too conservative you don't want to risk doing something stupid that jeopardizes your relationship or your ability to provide so you may end up not being

prepared to take even the small necessary risks that you have to if you want to be a Speculator in the markets and then under the influence of the caring for family sub sself you may experience a very similar risk aversion you need the money to put food on the table and keep a roof over their heads so don't take any chances with it and in this case again you may be too risk of verse there's loads of examples of well-known traders who only make trading decisions at the office they never do it at home at

the office their status and attracting the mate sub are far more in control so they are way more aggressive and this works well for their style of trading but then when they get home their family Subs is in charge so they become more concerned with protecting them and playing it safe so they can't make the aggressive decisions or take the required risks and and of course some people are the complete opposite and they trade terribly when their status sub sself is in control so they can only trade from home when they are Karma and they

are concerned about providing for their family it's really about understanding yourself and your sub to know which factors are influencing your decision- making but don't think for a minute that good Traders will find the off switch for these sub there isn't one what they've done is develop enough awareness to recognize what the systems are trying to achieve and what their purpose is and most importantly differentiate between these rather primitive motivational priorities and genuine measured threat detection and intuition there is of course a group of people who really understand our sub and how they influence our

decision-making advertises this is nothing new to them they know that Subs sales can be woken up very easily by targeting their unique priorities and anxieties they call it priming priming is simply a stimulus that activates the sub and Subs are easily primed have a look at this advert and pause the video and make a guess at which subs sself or selves you think vase was targeting the thing is that priming caps into system one priorities and anxieties that Vern very deep they may prime your physical harm Sub sself in order to sell insurance like here

for instance the physical protection sub sself is if you remember one of the earliest to come online so it's easy to prying and prioritize if you're not physically safe then you can't look after anyone else let alone reproduce so inducing fear for one's own safety is incredibly easy and it can never be ignored politicians of every persuasion are also incredibly effective at priming this Subs sself to get folks it's the oldest trick in the political Playbook and of course news and media stories that Prim list sub sself will always get your attention and therefore increase

the advertising Revenue that is attached to that story that's why the news is always negative and deliberately trying to stimulate your fear response I'm not saying that advertising is all bad by the way the product or service May indeed bring greater utility to my life but like trading we must have some basic awareness of these mechanisms in order to retain oversight from a system 2 perspective without oversight we will inevitably be sold things that we don't need or make trading decisions that are not statistically optimal advertisers may also try and Target our biological drive to

give our children the best chance of survival guilt and competition are very successful tactics those of you with kids will be very familiar of the pressure of advertising pring when it comes to giving a children the very best they can even Target your selfless drive to put your family before yourself again with respect to this out I'm not saying that buying life insurance is bad but if the priming of your care of family sub sself is very strong like this advert it may possibly stop you doing the right calculations to weigh up whether this is

actually a good deal or not if the insurance policy has bad terms and conditions and it's all together a bad deal the best way to get new customers is to hit them hard with priming and get them to act emotionally and impulsively get that signature in the payment the for system 2 can step in and do the boring weighing up and the comparative shopping around and of course we couldn't talk about priming without talking about sex given that our reproductive Drive is an overarching priority for system one advertisers lean on it an awful lot to

sell us things that really have nothing to do with sex or shouldn't do anyway like the salad dressing in this picture the next time you're watching adverts try and guess which Subs they are trying to pring and in particular how many of them are trying to tap into drawings or anxieties around reproduction and retaining sexual partners and it gets even more interesting when they start to mix things up and Target multiple sub here they've attempted priming of attracting the mate and the social status in one hit in a way these anlts are Target in hormonal

releases to change or impair our judgment and decision-making systems unconsciously and if this has been successful system 2 will be recruited to come up with logical and rational reasons as to why you want to buy this car by the time you walk into the BMW garage you may have convinced yourself that you want to buy this car because of fuel efficiency or good navigation systems and that's a really important point to remember for trading if system one has decided on what it wants because of these primed responses then system 2 will actually begin a project

of collecting evidence to support that decision if you like it's become a slave to system one I mean nobody's ever gone into a BMW dealership after repeatedly seeing an advert like this and tell the salesperson look I'm just buying this car because I reckon it'll improve my ability to attract a good genetic partner to reproduce with the decision is made based off emotions but system one recruits system two to manufacture a believable logical reason so that you think you're making a sensible rational Choice it's extremely clever so let's look at how priming of Subs can

affect trading what you see hear feel and think before you trade will most certainly influence your judgment and decision- making in trading it may seem farfetch blind debt with serious about the potential for unconscious priming of your trading decisions for instance having a picture of your partner or your children next to your trading screens is almost certainly a bad idea unconscious priming of your biological drive to provide for your family or keep a mate is certainly not compatible with thinking probabilistically you're far more like likely to be thinking in the short term and worrying about

the consequences of individual wins and losses all of these sub work on a very short time frame and the picture is only going to make you think of the results today rather than in more long-term probabilistic perspective perhaps the biggest and most common form of priming is listening to other people's opinions if you pay any attention to the news the Talking Heads the analysts you will be influenced whether you like it or not not system 1 will be looking for whatever move or conditions they predicted and when the market does something completely different instead of

trading what you see you will be trading what S1 is expecting to see you will be in conflict with the market instead of aligned with it you can also be primed if you open your mail in the morning and there's a huge tax bill or other bad news even watching or reading non-trading related news can easily upset you worry you or make you angry all of those things will Prime you and they will influence how you trade and it's for that reason that your pre-trading routine is so important your actions before trading should be consistent

and designed in a way so as to neutralize any of those Prime and effect as much as possible my pre-trade in MTI is identical every single day I do the same thing in the same order every single day and the trade environment in my office is the same every day my desk looks the the same my pens are in the same place my drink coaster is in the same position there are no pieces of paper left out or anything like rat and I never ever read my mail or check newss sites or any social media

I want as sterile an environment as it's possible to get before I trade and by having that same routine every day my system one knows what's coming next and it knows that this is the buildup to trade in it's primed correctly and it gears itself up for that specific task because it puts everything else out of its mind and it focuses on the task at hand my routine and my environment primes me to perform well now I don't want you to fall into the Trap of thinking that the power of system one and its defense

mechanisms and subcell are bad redundant or they just need to be fixed they are fast and Powerful for a reason they keep you alive and they are your secret weapon in trading it's just that they're not well suited for trading Straight Out of the Box you've heard me describe them as maladaptive meaning that they haven't been able to adapt quick enough for the trading environment but in their intended environment system one and its subcell are incredible mechanisms ensuring that we react before we have a chance to think consciously logically and rationally about it for instance

in the wild when our lives were genuinely at risk there was no time to be rational and work things out system one needed to react without thinking and it still would if a car or brick King hurting towards you you wouldn't pause to work out its actual mathematical trajectory in a way thinking comes later after system 1 has taken action to save you so system 1's method for the evaluation of probability and risk is not a mathematical or methodical one it's an automatic intuitive and instinctive one this is a very important point to remember for

trading when it's faced with a certain threat like an obvious lie imp pension on you in this case system one takes the decision to react with ease it knows it must do something urgently but with uncertainty when it's not sure whether it's a threat or not it's Unsure how to react and therefore it finds uncertainty particularly uncomfortable it means it has to stay on full alert all the time having to assume that it might be a threat if you walked alone in a dark forest at night there's a lot of maybe inclination your brain is

saying what's that noise what's that movement in the bushes what is that shape in the distance it's basically in maybe mode while it tries to analyze an unconfirmed Potential Threat so system one has three settings it's definitely a threat which is certainty it definitely isn't a threat which is also certainty and then maybe it's a threat I don't know which is uncertainty it is this may be set in that is the most stressful when system one is unable to evaluate the certainty of a threat it keeps us in a high state of alert ready to

respond in case the threat turns out to be certain this is your vigilance system that will run 24 hours a day keeping you in a heightened state of stress as it waits for more information to confir either way whether it's a threat or not it's a great survival strategy because if you relax and it does turn out to be a threat you're dead whereas if you stay stressed and Vigilant and it turns out not to be a threat oh well you've been stressed out for a while but at least you played it safe and you're

still alive now it might be a good survival mechanism but it's expensive from a calorie point of view and it's obviously uncomfortable so we'll do anything to increase our sense of certainty in any given situation system one will always try to get to the yes or no position of certainty we don't like that maybe State the trouble is there is no certainty in trading you've chosen a career in uncertainty whereby you have to operate in the maybe State whenever you're in the market I hope you're going to take the huge amount away from this course

in terms of improving your self-awareness and trade in decision-making but understanding that trading is a Navy State activity and accepting and managing everything else that comes with that is one of the central pillars of what I'm going to try and teach you the obsession new Traders have with win rates predicting price Direction and buzzword like high probability are all signs that they are trying to avoid the maybe State and find the comfort of certainty unfortunately it doesn't exist in trading okay so I've talked a lot about the sub priming and uncertainty but what about system

1's attitude to risk management well imagine you havn't eaten for days and then you came across a village that seem to have stored food and other resources that you might need to survive the risk in turn are trying to steal some of this resource is very high the villagers will defend their own supplies so the chance of you coming to physical harm is high so why would you ever consider trying to steal from them well of course you're already in a loss so to speak you're already at risk from malnutrition and death so system one

will quickly deduce that you have very little to lose so the risk is worth taking it's not something that you would normally consider but now it's your only option to try and get back on top system ones risk management system is very simple if it feels comfortable or has a lot to lose it advises you to be cautious and not take unnecessary risks but if food is short you're already in a bad way or you have nothing to lose system 1 automatically increases your tallenge to risk and motivates you to take more we are risk

seeking when we're behind and risk averse when we're ahead I've used the example of sports teams before winning teams play it safe and try to hold on to their lead that they already have losing teams have nothing to lose and they will take risks they will attempt extreme plays and do just about anything to make it come back the way system one motivates these behaviors is by memory recall when you're ahead it recalls a disproportionate number of memories we're taking risks and giving you losing what you already have essentially reminding you that taking risks is

a bad thing and you should play it safe but when you're behind it recalls a disproportionate number of memories we're taking risks paid off and you ended up making gains essentially reminding you that taking risks is a good thing and encouraging you to do it again now now going back to uncertainty system one has another strategy it uses to try and reduce uncertainty and get out of that maybe State and that is to learn as quickly as possible the cause and effect of our actions and environment imagine you lived in a jungle 10,000 years ago

a friend reported being bitten by a strange spider in the morning and was dead by the evening system one would most certainly assume that the spider had killed your friend it looks for and assumes causation meaning the spider caused the death it doesn't consider that the two events happened in proximity possibly random which of course we call correlation even if your friend had reported feeling unwell yesterday the danger of not assuming that the spider was the cause of death is just too great it's another survival strategy of assuming certainty even in an uncertain situation it

plays it safe avoid those spiders from now on just in case they are poisonous it's better to remove the uncertainty and system one is an incredible cause and effect scanning the machine it's always going to assume cause and effect and learn a response rather than stay uncertain and not know how to respond of course in reality see correlation is not proof of causation just because something happens after something else it doesn't mean they are connected now imagine that you lived 10,000 years ago on a mountainous Island like this the world is completely mysterious and you

don't even understand what drives the Sun and the Moon let alone in frequent natural disasters so imagine that one day and for the first time in living memory this happened now given that this is not a routine event there must be a reason that this is happen happening and we need to know why I mean it looks pretty threatening now given our lack of information and dislike for uncertainty it's highly likely that you will try and work out and explain what happened so you rang up the village and you ask if anyone has seen or

done anything unusual or if anyone knows what the heck is going on then one of the villagers steps forward and reports that this morning his son have killed a parrot with a rock for fun now given that the mountain has just exploded and the villagers never normally kill parrots for fun a link is made and causation is quickly assumed and as a result a total bound on parrot killing is written up and forced in the village and then generation after generation are taught about the effects of killing parrots no more parrots are killed for fun

and children are taught from a very early age that killing parrots will anger the volcano and sure enough the volcano goes to sleep for another 800 years and the volcano silence becomes further evidence that not killing parrots stops mining exploding now I know that might seem like a silly example but from a survival and probabilistic point of view assuming causation and learning a response however far-fetched will always be a preferable strategy to stay in uncertain and if you do think it sounds silly let's look at a common trading example we've all heard people talk about

how the price Banks is off a moving average well a moving average is a delayed indicator that's derived from the price in other words the price must do something first and then the moving average is updated so they are correlated for sure but the price does not ever Banks off or in any other way respond to the moving average new Traders mistake correlation for coration all of the time there's a correlation between the weather and the sale of ice cream increased sales of ice cream are correlated with hot summer days but that doesn't mean that

ice cream sales cause the weather to get hotter City mistakes like this happen all the time in trading so now let's quickly review what we've covered in this video we've learned that our brains evolve to cope in an uncertain scarce and dangerous environment 99% of our existence has been in the world defending ourselves against bigger and faster threats we also discussed how system 1 is primarily optimized for survival and reproduction and these overarching priorities are split into subcell which can be easily primed and they all have the capacity to influence and strongly advise us using

powerful hormones the stronger the hormone release the less control we have over our judgment and decisions and I pointed out how system one is really an intuitive estimator of probability based on its own experience it evolved to cope with uncertainty by developing a three-staged model yes no and maybe and it assumes causation over correlation but much of the time gives false causation when really it was only correlation this video and the previous one form the core foundation for the rest of this course and we'll refer back to this information often but the next 10 lessons

are going to be concentrating on how to retrain these decision systems to help you achieve high performance trading the next lesson is judgment and decision- making in economics very specifically about why you make such bad trading decisions when real money is on on the line keep your eyes open for that link for that video it is an amazing lesson and it reveals the almost unbelievable and comical things that we do when we're trying to make decisions about money so I'll see you there