Rock Paper Scissors Lessons For Traders

Bet you didn’t expect to see that… Only the very best content from me! There’s a trading lesson here I promise, stick with it.

Rock, Paper, Scissors. You know the game. But did you know there are actual tactics you can deploy to give yourself an edge?

Yep.

All based on gaming theory. If you are playing against a typical person. (i.e. not a pro rock paper scissors athlete…)

• Studies show that men are more likely to throw rock first – so if you are playing against a man, throw paper to wrap the rock

• Women are more likely to throw scissors – so throw a rock to blunt the scissors.

I don’t know how true that is, and there are even more complicated tactics but here’s where it gets interesting for traders.

The University of Sussex did a Rock Paper Scissors study (yep you read that correctly, budget being put to fine use.) They found that people tend to make irrational decisions after a loss. What?

Yes, even in a game of total chance like rock, paper, scissors after a loss people tend to ‘downgrade’ the item that lost. Similarly, if they win, they add more weight to the item that just won. So if they won with a rock, the player is more likely to throw rock again.  If they lost with rock they are less likely to throw rock again.

In summary, humans are wired to behave irrationally after a loss or win. 

Oooo

Is this why it’s so tough to deal with trading equity swings? Lose money and you’re hard-wired to want to avoid the strategy that lost you money.  It doesn’t take much for us to start defaulting to irrational behaviour.

If that’s human nature no wonder it takes a real focused effort to stay rational, focused and stoic when trading.

Next time you make a mistake, be a little less hard on yourself.  You’re trying to unpick centuries of evolution. It takes time to control your response, just keep getting the reps in.

Here’s a link to that study.

Oh and guess what? They discovered that if money was bought into the equation the irrational behaviour was accentuated…