Gambling addiction, ‘authorities’ and herd instinct: the psychological traps that beset traders

As far back as the last century, psychologists formulated the principle of social proof, whereby people imitate the behaviour of those like themselves — it helps the individual survive while also prompting us to commit strange and often illogical acts. This and other psychological mechanisms form the core of personality, and it is precisely these that can play a nasty trick on a trader.

ForkLog examines how not to fall into one of these psychological traps, recognise destructive behaviour and protect oneself from rash actions.

From Losses to Suicide

In 1974, American sociologist from the University of California, San Diego, David Phillips, identified a pattern: after wide media coverage of a suicide, the number of suicides in the newspaper’s distribution area increases tenfold.

This is a consequence of the social proof principle, writes American psychologist and professor at Arizona State University Robert Cialdini in his book ‘Influence: The Psychology of Persuasion’. A person confronted with an unusual situation looks to others and copies the behaviour of those equal to him in social status.

Such conformity to the general trend helps to escape danger, but causes some to make extremely ill-considered acts. This principle and a number of others can lead people working in the crypto market, at a minimum to serious losses, and at worst — to severe mental distress and depression.

The crowd and Me

There are many examples of one person blindly following the crowd. Herd instinct helped us in the past and continues to help us survive in difficult situations. The mechanism of its emergence is described in detail.

In any emergency or simply unusual situation the instinct commands a person to freeze and watch the actions of other individuals in the herd. And then — copy the behaviour of the most similar people to oneself.

The problem is that sometimes an emergency is simply a random sequence of events: two cars simultaneously drift off their lanes, and drivers behind imagine an impending crash. As a result, the whole flow turns into one lane, bypassing a non-existent obstacle, a book by Chaldini notes. And all because our subconscious mind reminded us — the majority do not err.

Most often a person succumbs to this psychological mechanism when two factors operate simultaneously: insecurity and external similarity to those they copy. And both are common in trader circles.

An experienced trader should have a long-term action plan and carefully calculated risks. The problem is that a trader may abandon it, falling into the social proof trap.

“Many suddenly begin to buy or sell, and the price of the asset moves. The trap is that this person stops following their plan, which rests on cold calculation and fundamental analysis, and goes along with the majority into a hypothetical abyss,” a crypto trader who wished to remain anonymous said.

Uncertainty can be addressed by studying the issue in detail and drafting a plan. One should be vigilant and regularly ask oneself: are all these people following an as-yet-undefined path really right, and is it worth copying their behaviour.

“Don’t think — there’s someone who’ll decide everything for us”

Another trap of the mind is somewhat similar to the principle described above. It can be characterised as blind faith in authorities, and it, like social proof, is built by default into the ‘operating system’ of every person, and has saved our species many times.

Numerous experiments have shown that most people are susceptible to the influence of authorities. Perhaps the most famous was conducted more than half a century ago by Yale University psychologist Stanley Milgram.

The gist was this: people were divided into two groups — “teachers” and “learners”. Participants were told that they would study the effect of pain on memory.

The ‘teacher’ sat in a room separated from the ‘learner’ by glass. For each mistake by the latter the ‘teacher’ — a perfectly ordinary person — had to press a button and deliver an electric shock to the partner.

Initially these were painless shocks, but with each error the voltage increased by 15 volts. Upon reaching a threshold of about 150 volts, the ‘learner’ began to plead for mercy and to request to be released. But the person in the lab coat behind the ‘teacher’ kept saying: “Please continue.” And he did, driving the voltage to an unbearable 450 volts.

In Milgram’s experiment the ‘learners’ did not actually suffer — their roles were played by actors who fake distress. The moral distress was felt by the ‘teachers’, who also asked to stop the experiment. But the ‘scientist’ behind them urged to continue each time.

No one would have stopped the subject, who could well have said “I’m not participating” and left the room. But few did. The majority of otherwise decent citizens continued to torment their partners.

It is very hard to go against the urge to follow a leader — even a supposed one. According to Cialdini, there is something deeply ingrained in people: the need to obey authorities. At the same time we often fail to realise that they may be illusory.

Creating the image of a “market guru” is fairly simple — a title (which may be invented), accoutrements (photos posted in a Telegram channel showing signs of wealth — a watch, a car, a villa), and a presentable appearance (clothes, hairstyle, etc.). Even experienced traders can fall for such a person.

“I had the opportunity to buy 18 BTC, spending about $21,000. It was a pre-planned move. But then I called a person whose experience I trusted, and he said to me (this was before the fork, and it was unclear how it would affect the cryptocurrency): ‘Who needs this Bitcoin?’ I listened to his opinion. Over time, through mistakes, I came to understand — one should not pay attention to short-term and local news and listen to the opinions of others. It is always better to act according to your own plan,” said the crypto trader.

An example of following authorities can be seen in the Dogecoin story. The meme cryptocurrency gained weight thanks to the support of two leaders — Vitalik Buterin and Elon Musk. Many people lost money because they started buying the coin solely because of their words, and, of course, when it was at its peak.

Stock market traders are plagued by the same issues.

“The peculiarity of human thinking is that it understands probabilities very poorly. And all cause-and-effect relationships on the stock market are probabilistic by nature,” said Igor Galaktinov, investment expert at ‘BCS World of Investments’. “This gives rise to many cognitive distortions when, in the absence of understanding external cause-and-effect, the brain creates an abstract link between the internal and external.”

According to the expert, internal cues can take different forms. For example, they may be tied to price levels or to the opinions of the majority of community members.

Professor Cialdini believes that when confronted with an authoritative opinion, one should ask oneself more often: Is this person truly competent in this field?

“You should study more information from the past, and see what the people you consider authorities said. Compare whether this was true at the time, or if they were mistaken. And do not follow 100% the opinion of one person, no matter how much of a guru they present themselves to be. Better to rely on different sources when choosing a path,” said the crypto trader.

It is also useful to verify how reliable a source is in a given case, says Cialdini. After all, authorities, even the best-informed, may deliberately distort the information they provide.

Gambling addiction and emotional burnout

Discussions of pathological gambling began about half a century ago in connection with the spread of gaming machines. Psychologists coined a special term for it — ludomania.

With the growth of the internet, casinos moved online — sports betting, pools and financial pyramids appeared. It is clear that among the somewhat educated youth gambling in virtual casinos is not prestigious. But a trader who casually says, “I bought such-and-such coin yesterday with leverage and earned thousands of dollars” looks far more respectable in the eyes of others.

Not only do traders go down the same path and blow their deposits, they also develop a set of psychological problems that take years to overcome.

A novice trader becomes hooked on strong emotions, akin to falling in love, says a trader with the nickname Kent. And this can end in defeat, with the distress of losing a loved one.

“A very common situation is buying cheaply and not being able to close the position, not seeing any sense in it, yet greed controls them. Everyone wants to make the perfect game, buy at the minimum and sell at the maximum. But pulling off the perfect trade is exceedingly rare,” said a trader describing typical behaviour of beginners.

Strong emotions that grip traders are driven by stress, says business psychologist MCC ICF (Executive & Business) Andrey Evdokimov. Both the positive and the negative outcomes bring much distress, and this shows a person who cannot control their emotions is hooked on the drug of stress. A spiral descent may follow, which psychologists describe in four stages.

The first stage is emotional burnout, when a person becomes indifferent to everything outside the trading terminal. This is the crisis’s onset: the trader feels exhausted, undervalues personal achievements, and takes little rest.

In the second stage the symptoms worsen, and the trader finds it very hard to break out of their game.

In the third stage there is clearly expressed discontent with one’s surroundings and oneself, chronic anger and irritability, the sense that one has been pushed into a corner.

In the fourth stage the person slides into depression, and in the fifth reaches rock bottom — feelings of deep disappointment and despair take hold. In the end it may end in suicide or a serious mental disorder.

Ludomania, like depression, is not a minor matter to brush aside, but a serious pathology, and treatment takes a long time. Thus, in Switzerland a trader’s psychological rehabilitation course costs more than $95 000.

Evdokimov recalls working with a trader who, over three years, reached the third stage. Rehabilitation took six months. He had to work with a cold and indifferent man, a sort of Darth Vader, says the business psychologist. Yet the client wished to emerge from this state, which became the cornerstone of successful therapy.

“First we looked for the answer to why he accumulates money, and how to express freedom and independence in a creative key. In the end we arrived at the question — ‘What can I create for society and for myself?’” Evdokimov recalls. “The person began thinking about investing in businesses that benefit the world (eco-packaging), started supporting charitable projects, and freed himself from the addiction through this.”

But it is good that the person wanted to fix the situation. More often such a need does not arise.

“How do you wean a person off greed? At that moment the person is irrational and does not listen to anyone,” Kent said.

He advised aspiring traders to try to detach themselves from market playing, viewing the process from the outside. In his view, assets should be treated as chips rather than money. And buy only with available funds you are prepared to lose.

The best way to recognise the illness early is that you can deal with it yourself.

“If you want to play on the market more and more often, and life narrows to the size of the screen, it is important to admit to yourself that ‘I am a gambler,’” Evdokimov said. “If we talk about treatment, you must change your worldview and realise how destructive this addiction is. Find its cause. Almost always it stems from dissatisfaction with life.”

According to him, after admitting the problem it is best to tell loved ones, seek help and support. One should find a safe activity to distract oneself. One can change social surroundings, try to socialise more, spend time in nature, practise meditation, and exercise.

Participation in charity, creativity, and learning something new helps a lot. But even at early stages the process of breaking the addiction can take a long time and require professional help.

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