When Trading Becomes A Ruinous Gambling Addiction
Trading, a form of gambling, gets you high. It also can morph into the compulsive fear of not losing...then into an addiction...then into a financial crash.
In July of 2009, 64 year old Martin Hickman lost 200,000 British pounds (approximately $333,000) in a single day trading on the London Stock Exchange (the FTSE).
Hickman told The Telegraph (U.K), “I was going to be a househusband, take care of the dogs and do a little trading on the side. Then things escalated and I was hooked. I switch the computer on straightaway my alarm goes off at 6:30 AM and it stays on well until after midnight. I bore my wife silly, but she understands.”
Hickman’s story is only one of what appear to be never-ending examples of traders who continue to trade despite mounting losses. They manifest some kind of quasi-delusional confidence that they will hit what is called “The Big Fish Trade,” and win back everything they lost and more. They appear to be spellbound and mesmerized by the flickering ticks of their trading platforms, and are convinced that the “ten bagger” trade is just ahead if they keep watching, hoping and clicking.
Technical analysis can seem like a lot of mumbo jumbo with lines and squiggles on a chart. But what is it really? Human emotions plotted on a grid.
Sometimes they get lucky and win. Most of the time, they lose. Often, they lose big, but keep going because they are in a vicious downward cycle, doing what is called “revenge trading” to try to recoup their losses. This is a recipe for complete disaster.
What goes on in the brains and bodies of those approximately one in 10 traders who are addicted to trading? Plenty. The body-mind connection is evident and compelling in the stress that traders experience on a second-to-second basis. Moreover, the destructive mental and physiological consequences become more evident because of one thing: Addicted traders absolutely have to be in the markets at all times; they desperately need to be trading.
At one level, this is a type of addiction to excitement, mediated in part by a neurochemical called dopamine. It is the thrill of the game, and the rush that comes from the anticipation of reward. But there is more than just dopamine. A 2013 study from The Imperial College, London and the University of Cambridge cast doubt on the role of dopamine in compulsive gamblers. Although the sample size was small (nine males), their findings suggest that other brain chemicals are altered in pathological gambling. Dr. Tim Fong, Co-Director of the UCLA Gambling Studies Program says, “The brain of a pathological gambler is very different than that of a social gambler while they play," he said. "The neurotransmitters dopamine, serotonin and norepinephrine play an important role in all addictions. In pathological gamblers, certain dysfunctions are present prior to addiction, and put people at higher risk of developing such behavior.”
MRI (Magnetic Resonance Imaging) scans show areas of the brain that activate or “light up” when a person believes he or she is about to get a monetary reward. There is a social stigma around money. It may, in fact, be the last great taboo of our culture. People will tell you everything about the most intimate details of their lives, but they will not tell you about their money: How much they have. How much they want. What they think about others who have more or less money than they do. What money really means to them.
AS SICK AS YOUR SECRETS
Traders and others suffering from addiction are sick because of their secrets. In order to conceal their secrets, they lie and deny. But the brain can’t lie when it is placed in an MRI Scan. The brain images tell secrets that the addict can't or won’t express. Money is the biggest secret of all. It’s more secret than drugs or alcohol. People have more emotions of shame, guilt, greed and lust around money than perhaps any other singular thing.
And so it goes. Traders boot up their computers, turn on their trading platforms and become hypnotized by the flickering ticks. Each tick of the market represents the sum total of the greed and fear of every single one of the millions of people trading at that time. Some traders use what is called technical analysis to find trades. Technical analysis can seem like a lot of mumbo jumbo with lines and squiggles on a chart. But what is it really? Human emotions plotted on a grid.
Once the addicted trader gets going, the thought processes are something like this:
"I have to get in right now, because the price is running away from me. If I just chase it just this one time, it should be OK because it makes me feel so good when I see the price going up, and I am convinced that I can make a killing on this one. Why should I wait for the price to come to me? Maybe it won't, and then I will have missed it all. There's no fun in that. "
This sounds all well and good, and the dopamine brain pathways, activated by potential for reward, kick into high gear. The dopamine neurons are firing on all cylinders, and the feeling is one of pure exhilaration. It's all good and wonderful—until it isn't.
Suddenly, the position starts to turn against the trader. He or she made the fatal error of chasing price, and it came “back in” and now the trader is looking at drawdown. Drawdown is loss. Loss hurts. The brain registers losses 2.5 times more intensely than it feels gains. A loss of $10,000 feels like a loss of $25,000. Chasing caused pain, and now the pain is financial, physical and psychological.
The dopamine and other reward pathways of the brain shut down, and the brain connections that mediate fear begin to activate. This is trader volatility, as emotions rush back and forth from highs to lows. Markets have this effect on unseasoned and impatient traders who are greedy when they should be fearful and fearful when they should be greedy. The end result is confusion, frustration, blaming, self-sabotage, addiction and systemic toxicity. All of these drain the trader and leave him feeling empty, confused, disillusioned and just plain worn out.
A PHYSICAL SICKNESS
Losing makes people physically ill. A study by Joseph Engelberg and Christopher Parsons from the University of California at San Diego showed the following: A one-day drop in equities of approximately 1.5% is followed by a .26% increase in hospital admissions on average over the next two days. Additionally, the impact on psychiatric conditions such as anxiety or panic disorders is even stronger, with hospital admissions nearly doubling in one day. Losing money makes people sick and sick people even sicker!
Novices who want to learn to trade are taught a singular lesson before they even put one penny into the markets: Preserve your capital. They hear this, but most do not listen. They see trading as some magical process in which they can sit in their pajamas, click a few times, and suddenly see monies pouring into their accounts. They end up chasing, getting whipsawed and losing. Drip, drip, drip—and then larger chunks of losses and then maybe a margin call and then they are out of the game. The addicts add more money to meet a margin call. This is called throwing good money after bad. It won’t be long until they are also out of the game. Addicts don’t know when to stop trading. They think that tomorrow will be the big win so they do everything possible to get money to bring their accounts up to where they can trade again. They lie, cheat, and steal to do this. Eventually, they fail. Some hit absolute rock bottom.
They are out of capital. But it’s not just financial capital. It’s a whole lot more than money. It’s psychological, physical, emotional and spiritual. They are lost and floundering. At this point, they become prey for the thousands of vultures, cons and hocus-pocus creatures claiming to be the best traders who ever lived, who are out there selling them instant riches. They will bite on the bait and lose more money. Some will pay tens of thousands of dollars to be mentored or coached by another trader. Others will spend large amounts of money to buy programs that promise the Holy Grail of Trading or The Best Trading System in the World. Think about it for a second: If these gurus are so great and have such fabulous trading systems, why are they selling them to you? Why aren’t they out on their own private island, soaking up the sun, sipping a cool one and making millions?
Traders at the height of their addiction will grasp at anything that they think will rescue them. But there is no rescue. There is only more despair, loss of money and total psychological and financial destruction.
When a trader is stressed, sleep-deprived, contaminated with continual worrisome thoughts or in a toxic state because of bad trades, there is nothing but despair, self-loathing, anger or depression. Suicides occur. The trader enters a state of mental and physical dis-ease and whipsaw, and should absolutely not be trading.
One of the most legendary traders that ever lived was Jesse Lauriston Livermore. Known as the “Boy Plunger” or the “Great Bear of Wall Street,” he was notorious for winning and losing millions of dollars. At the peak of his career, his net worth was estimated to be $100 million. On November 28, 1940, at the age of 63, Jesse Livermore walked into the cloakroom of the Sherry Netherland Hotel, sat down calmly, and shot himself in the head with a .32 Colt automatic. The suicide note to his wife said that he was “a failure” and “tired of fighting.”
Kevin Depew, co-founder of the renowned financial multi-media website Minyanville and an editor at Bloomberg News said this:
“I'm a gambler by nature, and once, for a time, even by profession. It's a cruel and unusual occupation and few can walk away from it without a permanent hardening of the heart. There's no easy way to describe the occupation of gambling to those who have only pursued it as a sport. Just know that the adrenaline rush from winning is no match for the deeper, more subtle fuel losing provides. And, like any drug, the hangover, comedown, and aftermath inevitably subsume the pursuit of those brief, spastic bouts of ecstasy, eventually replacing it.
All gamblers die broke; it's a cold hard truth, but not for the reasons most people think. All gamblers die broke because the pain of losing is felt so much more intensely than the joy of winning. Thrill junkies choose gambling for the intensity of the experience, and behavioral psychology long ago demonstrated that the mind's ability to choose rational thrills offering positive rewards over more intense thrills offering irrational, negative rewards is pitiful at best. We're simply not wired that way.”
Dr. Janice Dorn is a Brain Anatomist and Board Certified Psychiatrist and Addictionist who comments on financial markets, trades actively and mentors other traders.