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The Power of Priming: Are Your Trading Decisions as Free as You Think?

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by Giles Coghlan, Chief Currency Analyst at HYCM

Certain character traits are often associated with traders. We like to think of ourselves as independent thinkers who are not easily led. We also prefer to believe that we’re rational, that we see things for what they are, and can be counted on to make difficult choices under risk in an unemotional way. We are human though, and if behavioural economics has taught us anything, it’s that human beings are a far cry from the rational, narrowly self-interested utility maximisers of classical economics.

On the one hand, we have the perfectly rational models of human beings often used for economic and game theories. On the other, we have the picture of human irrationality and fallibility that disciplines, such as behavioural economics, have been revealing to us since the 1970s. We must learn to situate ourselves in the space between these two if we’re to get to grips with what makes us tick, and improve our chances when operating in the markets.

In the following article we will focus on priming, a fascinating psychological phenomenon that’s not a cognitive bias per se, but can influence your decision-making in a way that is just as powerful as a cognitive bias.

Priming Is EATING Your Profits

Priming is a phenomenon in which people that are exposed to certain stimuli can be influenced to respond in specific ways to other stimuli that are beyond their conscious intentions. When asked to complete the following word puzzle: SO_P, you are now probably more likely to respond with the word ‘soup’. That is because the title of this paragraph primed you to do so. Had the title read: “Priming is WASHING away your profits”, you would have been more likely to respond with the word ‘soap’. The effects of priming also hold for symbolic and metaphorical primes. For instance, when people are asked to imagine something that they are ashamed of they are more likely to solve the following words: S__P, W__H, as soap and wash, rather than shop and wish.

The effects of priming can be quite incredible and are not just limited to word associations. In a now-famous study by Bargh, Chen & Burrows (1996), certain groups of students were primed with words such as Florida, bald, forgetful, Bingo, wrinkle and grey. They were then asked to go to another office down a hallway to continue the study without knowing that it was the walk itself that was the experiment. Those who were primed with words that suggested old age were found to have walked to the office significantly more slowly than those who hadn’t.

Other studies have shown that something as simple as holding a pencil between your teeth in a manner that forces your mouth into a shape of a smile, will leave you more likely to find something amusing. Also, repeatedly nodding or shaking your head while being presented with ideas will make you more likely to either agree or disagree with them.

As you might imagine, priming is used ruthlessly in advertising where psychological tricks are used to make you even incrementally more likely to purchase one product over another. Interestingly, Dalton and Andrade (2011) found that brand names have priming effects, but the slogans that they use have reverse priming effects. For example, priming subjects with a brand name like Walmart, which is typically associated with saving money, had the subsequent effect of influencing subjects to spend less. However, Walmart’s slogan, “Save Money, Live Better” actually had the opposite effect, inducing subjects to spend more. This is because people perceive slogans as persuasion tactics and unconsciously rebel against them.

Priming Trading Behaviour

It’s astonishing to consider that many of what you believe to be your own decisions can be the product of priming. Whether it’s deliberate – as in the case of marketers trying to guide you to their product – or just due to certain random associations that take place as you go about your day, it should give you pause because it suggests that you may be acting in ways that are not entirely the product of your own free choice. That is especially relevant to traders, who are required to be as logical and unbiased in their approaches as possible.

In a pair of studies in 2016, Mantovani & Galvão were able to demonstrate that subjects who had been primed with brands that had highly audacious character traits associated with them were subsequently more likely to make riskier financial investments than those primed with brands that had less audacious associations. The subjects were business administration and economics students who were primed with different sportswear logos before being asked to decide between different investments. What’s particularly fascinating is that the two stimuli were completely unrelated. One was a sportswear brand, the other a financial decision and yet those primed with the brand perceived to be more audacious and risk-seeking were shown to be more risk-taking in their investments in a statistically significant way.

Steps to Take

Daniel Kahneman, the Nobel laureate who inaugurated the study of behavioural economics along with his partner Amos Tversky, has said that he hopes the wider availability of these ideas will stimulate “watercooler conversations” that intelligently discuss the implications of findings such as the above. The idea is that the more we educate ourselves to the ways that we are unconsciously affected, the less power these things may have over us. The fact that slogans can have reverse priming effects shows us that it’s not as easy to manipulate a savvy consumer today as it once was.

In trading, we have to cast our minds to all the ideas that we are unconsciously “sold” on throughout our trading day. It pays to remember that much of the financial press doesn’t hold itself to standards that are any higher or more rigorous than the rest of the media. The aim of the game is to capture your attention at all costs in the same way as tabloid headlines do. So, you may be thinking that you’re receiving the objective facts when in reality you’re jumping from one emotionally charged headline to the next, which could be influencing you in ways of which you are unaware. That is why financial television often ends up covering market bubbles after they have already become dangerously over-inflated; the dot-com and Bitcoin bubbles are two perfect examples. The same holds for bear markets. People were still being induced to buy stocks all the way to the very top just before the violent correction we recently witnessed. Even now, a little over two months after the crash, they are being enticed to buy the dip.

Mental hygiene is crucial for us all but much more so for traders, whose livelihood depends on them sticking to their rules and not being influenced by anything other than the signals being provided to them by their systems. For this reason, you need to have a routine that minimises external influence and maximises your self-reliance and sense-making. In our media-saturated age, we think of it as entirely natural to encounter dozens of social media posts, YouTube videos and news headlines before we even sit at our desks. Maybe it’s time to start thinking of our access to all of that material as a bad habit. A healthy body requires a regime of clean food and physical activity. Perhaps a healthy mind needs something similar.

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