Money and Emotions

(image copyright The Open University 2010)

I've been enjoying a little look around the "iTunes U" online university and found some podcasts from The Open University and in particular thought this one had some relevance: Money and Emotions

They are looking at how emotions affect financial decisions and as well as discussion from the people carrying out the research they interview a few city traders including a Forex trader.  It's interesting to hear from the Forex trader that he feels a lot more comfortable with his positions when they're going the right way rather than against him.  It doesn't sound much different to someone sitting in hope watching their Betfair trades!

As is all too often the case when it comes to successful trading, the piece doesn't offer any solutions, but there are some surprising points.  For example, one observation they made from their analysis is that contrary to popular belief, people largely devoid of emotion but with all their logical reasoning in tact were not better at making financial decisions.  Furthermore, one of the traders' managers at a bank felt that outbursts of emotion such as banging the desk / throwing the phone etc was helpful!  Her reasoning was that she felt they need to let off steam and can subsequently make better decisions if they've got it out of their system. 

Personally, when I've "had a moment" I have frequently gone on to have a winning day, but very often at the (potential) cost of taking far greater risk.  So, yes, sometimes I've just made things worse.  What I have noticed though is that I've made several of my most profitable trades in this mindset.  Trading is inherently risky but, particularly when I'm happy with the way things are going, I naturally start becoming more cautious - and hence limit my potential profitability.  I guess the ideal balance is to remove the fear of taking a reasonable amount of risk whilst not needing to get steamed-up to do so!

Has anyone found any other research into this topic which may be useful?