After blowing up their account, people can often explain exactly what went wrong: their position was too large, they didn’t set a stop-loss, they chased the price higher. But when the market opens again, they do the same thing all over. To understand why someone can’t control themselves, we first need to look at three things. They aren’t flaws in your personality—they’re default settings built into the human brain.

The first is called loss aversion. Winning a hundred dollars feels noticeably less good than losing a hundred dollars feels bad. This isn’t just a figure of speech; it’s a pattern that has been observed repeatedly: the pain of losing a hundred dollars takes a gain of two hundred dollars or more to offset. So when people make decisions, their first thought isn’t “How can I make more?” but “How can I avoid losing?” In everyday life, this tendency is a protective mechanism. In trading, it can backfire—it makes you instinctively want to wait a little longer and see what happens when you should admit you were wrong.

The second is called the sunk cost fallacy. Money you’ve already lost and can’t get back has nothing to do with your next decision, but it still affects you. The classic scenario: you’re down $300 on a trade, and instead of asking yourself, “Does the logic behind this trade still hold?” you think, “I’m already down $300. If I get out now, that loss will have been for nothing.” So you put in more money to try to win back that $300. Notice how absurd this is: that $300 is already gone from your account. Its only effect is to hijack your judgment.

The third is called the disposition effect. You’re quick to sell when you’ve made a little profit and lock it in, but when you’re losing, you hold on and refuse to sell. Why? Because selling at a profit means “confirming I was right,” which feels good; selling at a loss means “confirming I was wrong,” which feels bad. Loss aversion makes you avoid that bad feeling, and the sunk cost fallacy makes you reluctant to admit defeat. Together, they make you fall into the disposition effect almost automatically: you can’t hold on to winning trades, but you cling tightly to losing ones.

Put these three together, and the result is clear. Many people take a $100 profit and run, but keep holding when they’re down $100. Over time, they end up with lots of small wins and big losses. Win eight times out of ten, making $100 each time, but lose $500 twice, and you’re still down $200 overall. That’s why some people seem to have a high win rate, yet their accounts keep shrinking—not because their judgment is wrong, but because emotions make them hold and let go of each trade at the wrong times.

The easiest thing to get wrong here is thinking that you just have a “bad mindset” and that next time you need to keep your cool. That conclusion is wrong for two reasons. First, loss aversion, the sunk cost fallacy, and the disposition effect all have names and have been observed repeatedly in numerous studies. They’re common human tendencies, not personal flaws unique to you—even professional traders experience them. They just use rules to keep them in check. Second, precisely because these tendencies are our default settings, it’s almost impossible to fight them through willpower in the heat of the moment. The discomfort is real, and when you’re wrestling with yourself in that moment, you’re far more likely to lose than win.

So what actually helps isn’t “I’ll definitely stay calm next time.” It’s writing down rules in advance, while you’re calm. For example, decide when you open a position how much you’re willing to lose at most, and get out when you reach that point. This moves the question “Should I sell?” from the moment when your emotions are running highest to the moment when you’re calmest. As for how loose or strict the rules should be, whether to follow them mechanically or leave some room for discretion, different people do things differently. There’s no one-size-fits-all answer.

You can’t get rid of these three tendencies, but you can learn to recognize them. Recognizing “I want to put in more money right now because I can’t bear to let go of that $300” is more effective than any amount of willpower. The most important thing in this lesson is to replace the vague self-blame of “I have a bad mindset” with three specific mechanisms you can name.

📖 This course publishes one lesson a day, for a total of 42 lessons. You can find the full list in the pinned course index post.

⏭ Next lesson: Lesson 31 · How to review your trades effectively

⚠️ This lesson explains “why this happens,” not “what to buy.” It is not investment advice.

That’s it for this lesson, “Why do we do things even when we know they’re wrong?” Remembering the easiest thing to get wrong is more useful than remembering the conclusion.

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