When someone mentions meditation, you could be tempted to think of Buddhist monks in their silent retreats meditating all day long… but the truth is, you don’t need to be a spiritual person to meditate. Anyone can meditate, any place, any time. Meditation is not just for religious people — it’s a practical way to train your mind to achieve the results you desire. For this reason, a growing number of investors and traders are turning to meditation and mindfulness to take their stock investing skills to the next level.
Meditation and mindfulness improve stock investors’ performance by:
- Enabling them to take control of their cognitive biases when investing.
- Helping them manage emotions such as greed, fear, worry and panic.
- Giving them the tools to differentiate between the past, present and future, which in a busy mind of a stock investor can all too often get jumbled up.
- Helping them make better decisions from present-centered awareness.
- Improving their metacognition and decision making skills.
Meditation and mindfulness do more than simply calm the mind of a busy investor. Their benefits are so tremendous that you will be asking yourself, “why haven’t I started meditating already?”, and if you have started this practice, you will be telling yourself that you should definitely do it more often.
For more on calming the mind, see here how scientifically you can change your brainwaves with yoga and meditation.
Meditation and Mindfulness Improve Investors’ Decision Making Skills
Our judgments are often clouded by faulty reasoning, gaps in memory and attention. Human brain is a biased and limited resource. It can often fall prey to cognitive biases, i.e. systematic errors in thinking and interpreting the information we have available. These errors in thinking make us susceptible to erroneous assumptions and affect our decision making abilities. This is costly when the decisions you make are related to stock investing.
The term cognitive bias was first introduced by behavioural economists Amos Tversky and Daniel Kahneman in 1973, who won the Nobel Prize for it. Since then, behavioural economists worldwide have devoted a great deal of time and energy to studying them.
Despite that, a survey done in 2014 by CFA Institute Financial NewsBrief has shown that 56% of respondents have not managed to successfully implement behavioral finance principles in their business. Behavioral finance is defined as the study of how irrational behavior affects market prices. Irrational behavior in stock trading comes up when investors stray away from rational thinking and become susceptible to unnecessary risks.
Meditation and Mindfulness Help Investors Improve Stock Investing by Reducing Cognitive Biases Such As Sunk-Cost Bias
We are all prone to cognitive biases. They are very difficult to get rid of. We can be familiar with cognitive biases all we want; it still doesn’t mean we are above them. As Kahneman explained at the 65th CFA Institute Annual Conference, “Knowing the errors is not the recipe to avoiding them.”
One such bias so important for stock traders is the sunk-cost bias. This is the tendency to stick with a losing project. Why? Often, because of the time, energy or money we invested in it in the past. Instead of cutting our losses, and moving on to a new and promising project, we keep at it and we continue losing money. One study done by Andrew Hafenbrack of INSEAD in Singapore showed that a short 15 minute mindfulness meditation enabled participants to deal with this bias better. The researchers reasoned that our wandering minds dwell too much on the past, thus enforcing this bias. By practicing mindfulness, we are anchored in the present, not in the past, and can thereby obtain a clearer picture of what is no longer serving us and sever those ties.
If you happen to be confused about the difference between mindfulness and meditation and wish to learn which is which, head over here.
Investors Also Can Improve Stock Investing Through Mindfulness and Meditation by Reducing Implicit Bias and Reward-Seeking Stimulation
It is certain that allocating time for practicing mindfulness for 15 minutes before engaging in investing will keep our minds more open to the present facts instead of being biased by the past events. By focusing on the present, we are more likely to think and act more attentively and not make our business decisions based on autopilot and previously created connections that might not apply to the tasks at hand.
Another bias that mindfulness and meditation can reduce is implicit bias, a bias based on automatic associations which influences our behaviour more than we know. Examples of such bias are ageism and racism. In one study a group that listened to a 10 minute mindfulness exercise showed less bias towards age and skin color than the group who didn’t.
Another study showed that the brains of those participants who practiced mindfulness meditation showed less stimulation when seeking rewards. This enabled these participants to keep their cool. They didn’t allow the monetary reward chasing to affect their well-being and performance.
As the research on meditation, mindfulness and stock trading goes on, I am sure we will uncover that many more cognitive biases, so crucial when investing, can be counteracted by a daily dose of mindfulness and meditation.
Mindfulness and Meditation Help Investors Develop Trading Discipline and Control Emotions
Mindfulness and meditation are useful to stock traders because they increase their trading discipline. Investors with higher trading discipline plan their steps and strategies and follow them strictly. They are aware of how much risk they should take and invest in their portfolios accordingly. They do not let their emotions affect their investing decisions.
Being a good investor does not just involve having the skills and knowledge necessary. It also requires a strong trading discipline and being resilient to uncontrolled emotions that can interfere with rational thinking. Uncontrolled emotions are known to affect traders to change their well-planned steps and lead them to make losing trades.
Investors’ irrational behaviors in the stock market come from listening to their emotions too much. Such emotions that cloud investors’ judgment are fear, greed, confidence, and hope. Greed, for example, which is a desire to have something we don’t, can influence investors to pay less attention to investment risks. Fear, on the other hand, may cause them to become afraid of the drop in stock prices and influence them to panic sell. For example, volatility in the change of stock prices may lead some investors to experience stress, which can influence their decision making skills. Examples of impulsive behaviors that foster a lack of trading discipline and listening to emotions too much are panic selling and overreaction to news.
Meditation and Mindfulness Help Investors Increase Stock Investing by Reducing Overactions to News or Other Types of Irrational Thinking
Panic selling is the tendency to sell stocks as a reaction to emotions such as fear instead of basing their decisions on rational judgment. If there is a falling of a stock price, to the investor holding the stock, this serves as information that a group of investors has been selling out the stock. If the investor becomes afraid of the price decrease and decides to sell out his stocks simply because other people are selling it and not because of any valid arguments, then they are exhibiting panic selling. On the other hand, if the investor decides to keep their cool in spite of the momentary drop in the stock prices, and keeps following their previously planned trading strategies, then they are following rational thinking.
Overreaction to news happens when overconfident investors overreact to the information they own. Let’s take an example of an investor who already invested on the market based on the information he previously possessed. What if an investor receives good news that supports his previously held beliefs about the stocks? Well, he or she may be tempted to overinvest. This happens when investors have lower trading discipline and consequently, let overconfidence guide their investment plan.
Meditation and Mindfulness Improve Stock Investing Performance by Nurturing Discipline, Mental Clarity, and Emotional Stability
If the investor allows emotions to affect their trading plan, he will sell his stocks sooner although the drop in stock prices might be due to temporary volatility. By nurturing trading discipline, investors will follow the steps they had previously planned and will not let emotions affect the execution of these steps. Trading discipline has been proven to lead to success in trading performance because it aids in diminishing irrational behaviours.
Mindfulness meditation helps induce mental clarity and emotional stability. Many studies prove that mindfulness meditation enhances trading discipline. Why? It trains people to nurture self-discipline by teaching them to observe their thoughts and emotions with acceptance and without judgment. This leads to greater self-awareness and self-regulated behaviour. By training oneself to observe their thoughts and behaviors, investors are less likely to yield to impulse and disregard their trading strategies. Furthermore, investors trained to be conscious of internal and external factors without judgment and bias will not succumb to irrational conclusions and cognitive biases in trading.
Numerous studies have demonstrated that practicing meditation and mindfulness lowers anxiety, stress and mood instability. Even short-term meditation training has been successful in lowering depression, fatigue and anger. Also, those who practiced mindfulness meditation regularly had higher emotional intelligence and developed a strong belief that they can tackle any task at hand.
And for more on lowering stress and anxiety on a Monday, go here.
Meditation and Mindfulness Increase Investors’ Metacognition and Present Moment Awareness
An important trait for investors to develop is metacognition, which is the awareness of what we know and don’t know. It enables us to see the world as it is instead of what we would like it to be. This is an imperative skill to hone when working with risks and uncertainty. Why? Because metacognition is in charge of our rational decision making skills.
Meditation and mindfulness aid us in separating and reducing the noise. They can better identify the things which haven’t happened from what is actually going on on the market. Those investors who practice meditation report that their perception of the present moment and present facts has improved. Instead of reacting from a place of fear about the past losses or worry about the future gains, they respond from present-centered awareness. Their reflection skills are also better. They enhance their cognitive processing skills and filter information better.
Successful and Famous Investors Who Meditate
You’d be surprised to hear how many illustrious investors have turned to meditation to boost their performance. Ray Dalio, the founder of Bridgewater Associates, the largest hedge fund in the world, attributes his success to transcendental meditation. (Learn here about the benefits, cost and what to expect from TM.) He claims that it helps him slow down, even amid chaos, so that he is able to make better decisions. Thanks to transcendental meditation, he thinks more clearly and creatively. He also made it available to all of his employees.
Other organizations followed in a similar vein. The CFA Institute, a global association of investment professionals, developed a meditation program for its members. The Wall Street firm Goldman Sachs Group Inc. also has a meditation program for its staff. So do BlackRock and Deutsche Bank. Also, several major business schools promote meditation to their students, some of which are Georgetown, New York University and Oxford.
Jason Apollo Voss, CEO of Active Investment Management Consulting stated that meditation his decision making skills. Instead of having his thoughts and decisions on autopilot like most people do, thanks to meditation, he can assess the quality of his own thinking better (metacognition). This is highly important for investors because they need to be unprejudiced and objective. After practicing meditation regularly investors are now able to see patterns in data and make connections quickly. They can achieve this just a few hours as opposed to the hundreds of hours it previously took him. Voss added that regular meditation slows down one’s reaction to critical events, such as a plummet of stock prices. They don’t resort to panic. Instead, they think things through.
Conclusion
Investing companies are constantly searching for ways to upgrade their performance — some turn to machine learning, others take on larger research teams, while quite a few have turned to meditation as the solution. Mindfulness and meditation bring calm even during major crises, such as losing all your money during a stock market plunge. They help us think clearly and wisely. Thanks to mindfulness and meditation, investors can cut through the noise and make rational decisions based on present moment facts and not on fear, greed, anxiety or stress. Investors who meditate report that they have better metacognitive skills, are more creative and less biased in their decision making.
Tatjana Glogovac, Senior Contributor At L’Aquila Active
Learn more about Tatjana by reading her bio below.
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