You are bombarded with information as a trader.
Markets are constantly moving. You are always monitoring them for the best setups.
You monitor your tweet deck, there’s a hell of a lot of good information from the good folk on twitter that you like to keep an eye on. Or perhaps you’re just waiting for the next Trump tirade.
You’ve an inbox full of research reports, economic analysis reports and technical analysis reports.
You’ve a squawk on in the background talking about every potential market moving event however insignificant.
That is a hell of a lot of information to process and it’s constantly fired at you all day long. You then have to decipher out of all this information, what is important and what is actionable.
I don’t know about you but after a busy trading day I can be like a zombie I’m so tired.
With so much information to process you have a lot of decisions to make in any given day. A large amount of decision making in any day can lead to decision fatigue.
Decision fatigue refers to the deteriorating quality of decisions after a long session of decision making. When you have to make a large number of difficult decisions on any day the quality of your decision making deteriorates as the day goes on. You have a limited reservoir of mental energy which depletes as we use it.
For example, professionals have been shown to make statistically worse decisions as the day goes on, this is true of judges, physicians and particularly traders.
Statistically a trader will tend to lose money later in the day if he has had a busy morning session. A trader could also statistically lose money in the morning time if they have got a poor quality of sleep.
Decision fatigue has been known to influence irrational impulse trading. The trader has less willpower to resist trading when they are tired. Studies have shown that a person’s ability for self-control against impulses decreases in the face of decision fatigue.
Uncertainty is a very mentally demanding and also physically demanding process. The brain uses a lot of energy when it has to process conflicting information. This mental pain is called cognitive dissonance and is essentially a doubt avoidance tendency ie a tendency to resolve conflicting information as quickly as possible to return to physical and mental comfort.
The key to overcoming decision fatigue is to minimise the amount of decisions you make on a daily basis and automate non-important decisions where possible. Common examples include what to wear, what to eat, when to complete daily activities such as going to the gym so you don’t have to think about it. This is widely recognised among the world’s top CEOs who frequently wear only one outfit to work in order to take that one decision out of their daily routine.
Each time we make a deliberate decision our brain is processing different scenarios and evaluating options. As the amount of decisions we make add up, so too does the amount of processing required by our brain. Just like any other muscle the brain too gets tired after repeated use. This means you have a limited amount limited amount of energy to devote to trading every day so you must manage it accordingly.