Discover How Thinking Like a Consultant Can Improve Your Trades

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█ Self–other decision making and loss aversion
You might think that I have discussed this topic in depth before, and you would be right. However, there is still much more to explore. This article delves into an excellent research paper by Evan Polman, which examines changes in decision-making behavior when choices are made for oneself versus for others. By studying self-other decision-making, we can uncover varying degrees of loss aversion and gain insights to enhance trading strategies and risk management practices.

█ Results
Polman's research reveals that individuals exhibit lower levels of loss aversion when making decisions for others compared to themselves. The study found that people are more willing to take risks and are less sensitive to potential losses when the consequences affect others rather than themselves. This reduction in loss aversion is attributed to increased psychological distance and a more abstract level of thinking when making decisions on behalf of others.




█ How Understanding Self–Other Decision Making Can Enhance Your Trading Strategies
In the dynamic world of trading, making the right decision at the right time is crucial. Yet, how often do we consider the psychological underpinnings that influence these decisions? Recent research on self-other decision making and loss aversion offers valuable insights that can transform our approach to trading and investment management.

█ Making Decisions for Yourself vs. Others
A study by Evan Polman from New York University found that people make different decisions for themselves compared to when they make decisions for others. The study showed that we tend to be less afraid of losses when deciding for others. This is known as having less "loss aversion."

Loss aversion means that people usually fear losing money more than they enjoy gaining the same amount. For example, losing $100 feels worse than gaining $100 feels good. This fear can make us overly cautious and miss out on good opportunities.




█ Psychological Distance and Construal Level Theory
According to the construal level theory (CLT) proposed by Trope and Liberman, the psychological distance between an individual and an event affects how they mentally construe that event. Greater psychological distance leads to higher-level, more abstract thinking, while lesser distance results in lower-level, more concrete thinking.

When making decisions for others, the increased psychological distance can lead to more abstract thinking, reducing the emotional impact of potential losses. This shift in perspective can decrease loss aversion, as decision-makers focus more on long-term outcomes and broader goals rather than immediate losses.

█ What This Means for Traders

• Less Fear of Losses When Trading for Others:
  When you trade for someone else, like giving advice to a friend, you’re less likely to be overly cautious. This can help you make more balanced decisions and potentially increase profits.
  
• Psychological Distance:
  When deciding for others, you think more abstractly and are less emotionally involved. Try to create this psychological distance when trading for yourself by imagining you’re making the decision for someone else. This can help you stay calm and make better choices.
  
• Better Risk Management:
  Knowing that you’re less afraid of losses when trading for others can help you manage risks better. Use this awareness to avoid being too conservative and missing out on profitable trades.
  

█ Practical Tips for Traders

• Think Like a Consultant: When trading for yourself, pretend you’re advising a friend. This can help you stay objective and make better decisions.
  
• Collaborate: Discuss your trading ideas with others. Getting different perspectives can help reduce individual biases and improve your strategy.
  
• Review Your Trades: Regularly look back at your trades to see if you’re being too cautious. Learn from your mistakes and successes to improve future decisions.
  
• Use Tools: Use trading tools and software that help you analyze risks and rewards clearly. These tools can support your decision-making process.
  

█ Reference
Polman, E. (2012). Self–other decision making and loss aversion. Organizational Behavior and Human Decision Processes, 119(2), 141-150. doi:10.1016/j.obhdp.2012.06.005

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Disclaimer
This is an educational study for entertainment purposes only.

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