Lesson 1. Neuroeconomics or How Brain Affects the Trading Effectiveness

It is not surprising that beginners find it difficult to take the first steps in trading. Human psychology is not well suited for trading. Fortunately, it can be actually fixed, because our brain is able to change and adapt. By developing the right mindset, you will be able to minimize the number of trading mistakes. Modern research in the field of neurobiology and neuroeconomics has revealed the key success factors for successful binary options trading, which will be discussed in our course.

Humans have been changing for millions of years, until evolution made us what we are today. It is necessary to understand the features of human brain functioning in order to direct it in the right direction. In the introductory lesson, you will learn exactly what prevents you from succeeding in trading and why this happens. We will consider the main success factors in binary options trading and find out how you can customize your biological neural networks to make profit in financial markets.

In this lesson you will learn:

1. Why people struggle with making effective investment decisions
2. How our neural networks and biochemical processes work
3. How the evolutionary development and human brain’s neural structure changed
4. How neuroplasticity helps to achieve success in binary options trading

Main Obstacles to Success in Trading

In recent decades, scientists have made significant progress in studying human behavior while making investment decisions. The results obtained have a lot to think about. Science says that people are characterized by emotional patterns formed during evolutionary processes. The standard human behavior patterns developed over millions of years are not suitable for successful trading.

In the course of numerous studies, supporters of behavioral economics have been convinced in practice that there is a tendency for people to act irrationally during trading. Specialists studied the impact of special cognitive, psychological, social and emotional factors. A novice trader’s decision-making process might be distorted for a number of reasons, including:

• Overestimation of capabilities;
• Inability to learn from mistakes;
• Letting emotions such as fear and greed to unconsciously determine behavior while making financial decisions;
• Following the crowd;
• Inability to objectively assess risks;
• Willingness to take risks under the influence of circumstances and not by calculations;
• Premature profit taking.

Studying the brain activity of investors and traders in more detail allows us to find out why errors listed above occur and how they affect the decision-making process. Laboratory experiments in the relatively young field of neuroeconomics allow us to make a number of extremely interesting conclusions.

Neuroeconomics or How Brains of Traders Work

Neuroeconomics is an interdisciplinary field that emerged as a result of combined efforts of economists, behavioral psychologists and neuroscientists in the 1990s. It examines the key aspects of decision making including risk, usability, rational and emotional decision-making mechanisms. Research in this field applies modern methods of studying the brain to analyze the processes that occur in a trader's head.

Core questions of neuroeconomics:

• How does the human brain work with money?
• Which neural structures are involved while handling financial decisions?
• How important are biochemical processes in the brain while working with money?

Brain scanners can demonstrate the enormous influence of emotions, cognitive biases and archaic instincts on trading in real time. A person acts irrationally most of the time. By looking at a trader's brain, many of the phenomena described in behavioral studies can be explained. Moreover, specialists are able to predict the behavior of investors and influence it.

Professor Bernd Weber, a clinical neuroscientist and dean of medical faculty at the University of Bonn, came to the conclusion that a human had no capacity for rational thinking in the light of his evolution. This suggests there is no biological adaptation of human brains to successfully invest in the stock market. The laws and functioning of financial markets contradict our models of behavior.

Neural networks in the brain have been developing ever since the first man appeared. We are the result of evolutionary selection, during which its genetic composition and structure have improved incredibly slowly. According to leading neuroscientists, the human brain has not changed much over the past 50 thousand years. Evolution simply couldn't keep up with the rapidly developing world. Unconscious behavior probably evolved as the best adaptation to environmental conditions.

Our living conditions have changed dramatically since the Stone Age, but evolution is not so fast. The human brain comes from another era. Deep-rooted instincts remain the key to our behavior, especially during times of emotional tension. Instinctive mechanisms are not suitable for trading in modern financial markets. People naturally act, while the stock exchange often encourages patience and waiting.

Is the brain system formed by evolution suitable for making reasonable trading decisions? Research in the field of neuroeconomics has given an unambiguous answer to this question: “No.” Our brains were created to help us survive in harsh conditions. Its nature is not adapted for making rational decisions
from an economic point of view.

Behavioral Patterns in Psychology

Deep-rooted reflexes influence our financial decisions. This applies both to traders and the majority of market participants. Strong price movements cause a corresponding emotional reaction and often lead to a herd effect. That's why, any financial exchange is primarily psychology. Frequently recurring speculative “bubbles” and stock market crashes speak for themselves.

You can overcome typical psychological problems and start trading effectively, but it will take a lot of practice and training. The first step is self-development and introspection. As a trader, you have to recognize and accept how your brain works. You should clearly realize that your brain’s structure is not adapted to work with the financial market’s mechanisms. You have no choice but to accept this fact.

You are not able to change your genetics, but you can learn to consciously control your emotions and natural reflexes. It should be done from the standpoint of an objective observer. When you learn to perceive your reactions more consciously, you will be able to avoid all kinds of psychological traps. You will start to adapt your behavior to the market situation, and not just recklessly follow others.

Our expert knowledge and analytical logical thinking power truly benefit only when we are able to reduce the negative impact of emotions. This is the only way to stay balanced and fully master your cognitive abilities, this way you will be able to unleash the full potential of your intelligence.

Neuroplasticity is the Best Friend of Traders

It is not easy to accept the limitations of your brain’s structures, but do not worry, modern research in the field of neurobiology is very optimistic. The human brain is very malleable and is able to change throughout our lives. It constantly adapts to new conditions together with the central nervous system.

This trait is called neuroplasticity (synaptic plasticity). It is the ability of our brain to change and optimize the processes and sequences of certain actions. In simple words, the brain works like a muscle: when you don't use neural structures and synaptic connections, they degrade over time. And vice versa, neural networks that you use intensively get stronger over time.

The term “synaptic plasticity” was first introduced by psychologist Donald Hebb. In 1949, he formulated the theory of neural ensembles, also known as the Hebb rule. Its essence comes down to the fact that the more often we activate the same nerve cells, the more tightly they bind to each other. It turns out to be a well–trodden path, that is, a rigid sequence of firing neurons.

Neuroplasticity always works in both directions, regardless of age. It means that you can:

• lose capabilities if you don't practice them;
• acquire capabilities if you practice them constantly.

You probably use a navigator when driving through unfamiliar places. As a result, when the hard work of processing information has been transferred over to the computer, it leads to cognitive unloading. Studies have shown that our natural orientation skills are degraded significantly in the case of regular use of GPS navigators.

Consistency of practice is the decisive factor in mastering any new skill. As the saying goes, repetition is the mother of learning. We can accomplish anything we want if we train regularly and intensively. Abilities are not inherited, there is no innate talent for trading. Since anyone can now open a trading account and start trading, many beginners underestimate how much time, endurance and practice it takes to trade successfully.

Success Factors in Trading

Talent is an important success factor in many areas of activity, but this applies to trading to a lesser extent. If you want to succeed in binary options trading, then you only need motivation, discipline and endurance. All these three factors are more related to work attitude, rather than talent. You will not achieve your objectives without the right attitude. If you want to become a professional trader, you will have to constantly develop and practice. The status of an expert can't fall from the sky, and you certainly won't be born with it. Success in trading depends on the willingness to learn — there is no doubt about it.

There are four main success factors in trading:

• Processes;
• Practice;
• Personality;
• Talent.

The secret of trading success is about the availability of clear processes and structures, as well as pre-selected strategies and trading plans. They need to be trained until your subcortex imprints the sequences that are embedded in them. Each stage of trading should turn into a routine as this ensures stability in stressful situations. Developed habits allow you to save cognitive energy, which can be used to solve more important tasks in trading.

In scientific terms, repetition forms and strengthens synaptic connections, which allows you to automatically perform certain actions. It doesn't sound very exciting, but it's the key to success. In the end, your behavior will not change from the fact that you just want it. New mindset is formed only as a
result of systematic work.

Trading is a special psychological and emotional challenge that people are not ready for in their natural state. It is necessary to develop processes in order to prevent the old reflexes from taking over in a stressful situation.

The process of gaining experience takes many years of hard work. Successful traders are distinguished by a focus on results, a strong will, a constant desire to always learn and develop further. At the same time, the amount of initial capital does not even matter. For example, the Pocket Option trading
platform allows you to trade even with $50 in your account and offers a built-in trading simulator where you can train trading skills without risks.

Here, your personality as a trader plays an important role. This is because your strengths and weaknesses will be revealed during trading. That is why it is so important to have a good combination of strong personal qualities and competencies.

Each trader has individual capabilities for certain trading styles and market niches. You can develop your strengths by practicing a lot. This way, you will become an expert in a certain field. It's all about finding the right trading environment that will suit your personal characteristics. We will discuss it in more detail in the following lessons.

You'll be able to identify your strengths and develop them in the most effective way by taking psychological tests for determining character traits and assessing competences. This method has helped a number of traders to make a real breakthrough in their development.

Remember: laying a foundation for a successful career as a trader is in your hands, or rather in your head.

Summary

Behavioral economics is a field of research in which behavioral and decision-making strategies are analyzed.

Neuroeconomics is an interdisciplinary field in which the economic theory of human decision-making processes is associated with knowledge about cognitive processes.

Neuroplasticity is a feature of the human brain to change under the influence of experience.