Hyperbolic Discounting

 

Over the years, I have noticed that most people experience an mindset (critical thinking) when trading the market that can greatly be improve with the correct analysis. The human mind is programmed to take “x” profits now rather than “x+y” later. This is called Hyperbolic Discounting.

Great examples are TSLA yesterday closing the trade while a superb ran up and Gold today not giving enough room to breathe. My decisions are back by hours of data research and I only trade if the systems tell me to do it however, some of you noticed that holding those trades longer the reward could be extended. Psychology is a huge part of trading in the financial markets so you need to always trade with the right mindset.

To fix this issue I recommend using targets and stops. On the other hand I have develop trading systems. This way all your trades have data to be analyzed after the event happened.

We can discuss if future gains are rational or not, but stopping the possibility of future gains is a rational decision – which can be very costly. Most of us are wired with the believe that an extension in time is a function of risk. The longer we hold a position, the riskier it becomes; that’s not always true. I used volatility measures to filter that hypothesis.

This is how I could explain it with the help some wikis.

Hyperbolic discounting is mathematically described as:

https://en.wikipedia.org/wiki/Hyperbolic_discounting

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