Further to my post of last week, why do I find it hard to stick to a plan when the market is not moving as expected? Because it is hard to hold an argument for why something abstract should happen in your mind, and easy to see how the market is moving at the moment. So the latter is more available when the time comes to put on a trade. This is one reason why trading plans are important: because a relatively long-term trader whose actions are based on research rather than implicit learning has to allow his actions to be guided by thought and not by the emotion of the moment. Perhaps you think, “Oh, that’s easy”, but in that case it is unlikely that you are a trader.
This same observation helps to explain why some people didn’t cut their equity exposures even as the financial crisis rolled on through 2008, and why so many people expected a V-shaped recovery and are now disappointed by data flow suggesting a slowdown. The financial world is highly abstract, and the financial crisis was both abstract (because a very bad outcome was prevented by the authorities) and unpleasant to think about. If you still have a job, perhaps as a financial economist or equity analyst, you still go to work, and you are expecting a bonus this year, then life won’t feel so bad. It requires an effort of both will and imagination to keep in mind that the situation is not as it was before the crisis, that all is not well with the world, and that further economic pain is a real possibility.