Apr

2

 Pain is a subject with which traders are probably familiar. There is psychic pain and physical pain. The amount or intensity of both kinds of pain is not commensurate with the amount of the loss in all cases. There is not a direct correlation between the increasing amount of loss and the increase in the amount of pain. For example, the pain of losing 100,000 is not a hundred times the pain of losing $1000, and the pain does not increase in a linear fashion. The pain of losing a loved one is not 1000 times more painful than losing say $100,000. (multiply amounts for wealthy readers). The pain of a small burn can be as painful as a major illness.

The other curious thing about pain is that it ends and its hard to remember after its gone. Experiments have shown that in time people tend to revert to their mean disposition even after horrific personal losses. Some people can handle pain better than others or recover at different speeds. When one is tired, small things can feel more painful. Pain and sadness are closely related to anger. There are mental techniques to handle psychic pain and effective drugs to deaden physical pain. I suppose one could write a book on the subject.

Sushil Kedia adds: 

Pain is a signal to consciousness or to the mind to search for changing the situation. Those traders who are not experiencing pain up to a level of loss are "willing" to lose that much and will thus have lost that much.

Like all of our perceptions, pain too is relative and there is no absolute measure feasible such as the measurement of temperature. Varying wealth levels or varying risk perceptions will, for one example for traders, bring varying intensity, length or sensitivity to pain.

For another example, in a simple surge-protector the fuse is expected to blow up before "paining" the computer to a point that the computer blows up. Some traders believe their stop loss strategies akin to this surge protector. Others believe their computers can withstand any power-surge, by placing some probabilistic calculations that having a surge protector will increase the probability of a power surge. Different hourses, different courses.

Jeff Watson adds:

The real sad thing is that you can be 100% right and the mistress of the market won't stop flogging you. Need to have my head examined. 


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