Scarcity Thinking: The Real Problem Behind Fear-Based Trading

Articles on Trader Psychology by Rande Howell, Trader Psychologist




It was a tough trade to manage.  It bounced around in its range, went against him, flitted with his stop a couple of times, then went sideways on him for a while.  Unnerving.  Though stressed, Tom maintained his composure just enough to stay in the trade.  Finally, it broke into the black.  That is when the urgency to take his profits now struck.  After all that uncertainty, he wanted to lock in a profitable trade.  Tom took the money.  He felt the relief as he sighed – whew!  Then, after all that trouble, the trade gained some momentum and hit his target in a few minutes.  Tom felt cheated now.  He left a good bit of money on the table, again.  Why didn’t he just follow his rules?  It would have been a good money maker.  But now, all he really had done was pay the broker. 

   It is so easy to look at this situation and describe it as FOMO (or fear of losing).  But what if there is more to this performance than just fear?  Is there also a belief behind the fear that goes unnoticed – but that drives the fear of losing or the fear of missing out on profits?

   Scarcity thinking is an implicit way of viewing and understanding the world.  It is the world view that keeps people stuck in dead end jobs, fearing what might happen.  “Bad things can (will) happen.”  It is thinking and believing that the good things can be taken from you if you are not careful.  “You’d better play it safe so you will not be sorry.” It is a way of being in the world.  And it keeps you from growing.  Scarcity thinking is the exact opposite of the probability-based mind needed for success in trading. 

Where Does Scarcity Thinking Come From?

   It comes from our adaptation to the uncertainty of the world around us because it promotes a better safe than sorry perspective.  It comes from the way we are raised.  It comes from our culture.  While our brain is in its formative period, it is learning the dangers of risk and the need to play it safe.  Let me give you an example.  John is a proprietary trader who has been told that he is leaving too much money on the table.  And if he cannot change the situation, then he has been told that he can no longer trade for his current firm. 

   At first this announcement came as a shock to him.  But after he settled down from the performance review, he took stock and realized that he was playing it a good bit safer than he used to.  People who knew him well had even joked with him about how he was turning into his father as he aged.  Now that he was married with a kid and a mortgage, the safety over-probability-mentality of scarcity thinking took root in his perception.  And gradually it grew to the point of interfering with his trading performance.  He started out with being comfortable with an edge in probability, but somewhere around the 2nd kid and the bigger mortgage – he began to gravitate toward the safety of perceived certainty.  That got him thinking.

   John was of Swedish descent and he grew up on a small mid-Western farm.  His family had an active church life and they were loving and tight knit in a Lake Wobegon way.  Unfortunately, small farm life was tough and financially unpredictable.  Even in good years, there was barely enough to cover the spread between income and expenses.  Money was always tight and the farm was marginal.  In lean times there was simply not enough to go around.  All the children wore hand-me-down clothes and rarely indulged in luxuries.  John would watch his father fret at the kitchen table, trying to figure out who to pay and who to lean on for payment.  And they always lived in fear that the bank was going to take the farm from them.  And a couple of times, they almost did.  The good news was that everyone in this tight knit farm community lived the same way.  Hand to mouth.  John swore that it would be different for him. 

   There was never enough to go around and what you had could easily be taken from you at a moment’s notice.  It was a perfect pressure cooker for developing a mindset rooted in scarcity thinking.  In fact, John (as a matured trader) would “fret” just like his father did at the dinner table while trying to figure out how to pay the bills.  As John’s rebellious youth faded and he moved into his 40’s, this fretting behavior that he saw modeled by his father so many years ago seemed to have awakened and become rooted in him.  In his youth John would take on risk, almost be defiant toward risk, and it had served him well as a young trader. 

   But now, he was past his youth, was married, and had teenage children of his own.  This is when the scarcity thinking found a toe-hold.  Now, it was not just him.  He had a wife and children, a mortgage, and an image to uphold.  That’s how the scarcity thinking kicked him.  He recognized that he was taking on some of the habits of his father.  He was scared of losing what he had, as his father had lost the farm.  This kind of memory is called limbic learning.  It is not conscious.  Rather it operates at a subconscious level in the emotional brain.  The emotional brain is only seeking a solution to survival and simply adapts “us” into a pattern of seeking safety over opportunity.

   It was not just the fear of losing or the fear of missing out.  It was also a life pattern that had taken on a life of its own.  This is the subconscious part.  John did not even see the established pattern operating in his life, much less in the performance of his trading.  Several months ago, he experienced a two-month drawdown.  And now, out of that experience, he was scared of letting his winners run because he was preoccupied with the perception that he might lose everything if he did not play it safe.  Remember, when he started trading professionally, he was not married, had no kids, and did not owe the bank money. 

   Now, he was more careful.  A little safer.  It just seemed like the right thing to do.  Gradually he saw a shift in his trading.  He knew he was leaving money on the table, but the safety factor grew and the probability factor that had fueled his early success receded as John settled into family life.  Safety over probability. John knew this was not rational for effective trading, but he could not stop the obsessive thought from polluting his thinking mind when he had trades in the black.  In the back of his mind, his limbic brain remembered a fretting father trying to pay the bills and the farm poverty he had experienced in his youth…the very scenario that he promised he would never experience when he was in charge.  The fulfillment of old generational life patterns was impossible to ignore – punctuated by his performance review.

Recognizing Old Limbic Patterns

   Scarcity thinking is one of the most common problems traders have with trading.  It is an artifact from our ancient evolution, where short term survival was a major concern for our Caveman ancestors.  Life was risky enough; our ancestors did not need to add more danger to the equation.  If they stuck their necks out too far, the chances increased that they would pay dearly for it.  So, over eons of emotional brain learning, our caveman ancestors learned to not risk too much – or everything (our lives included) could be taken from us. 

   Over time, these biological traits of short-term safety over long term benefit also became embedded into our personal psychology.  Gradually this trait surfaced in the way groups of people thought about risk and potential.  Remember, taking risks at this time always had a biological component to it.  And the price of that risk was death.  So, this need to avoid the dangers of risk (because of the fear of death) migrated into our psychology from its biological underpinnings.  And you experience this very phenomenon every time you risk capital with a significant upside, but with a loss downside also.  You are triggering the scarcity thinking that allowed our caveman ancestors to survive and move genetics into the future.  More than genetics though – you bring the phenomenon of scarcity thinking as a piece of your operating psychology into your trading performance.  This is where scarcity thinking becomes a dead weight hindering the probability-based mind needed for trading success.

Retraining the Brain and Mind for Probability Management

   The mind you brought to trading (unless you won the genetics lottery) is simply not the mind that is going to bring success in trading.  My hope is that you have seen this with the very innocent (and true) example of the proprietary trader, where old survival programming kicked in without his consent or knowledge.  John was surprised and horrified to discover that family traits that he thought he had left on the farm in Wisconsin grew new life and began messing with his trading mind as he passed certain milestones in his life.  Adding a family and a mortgage triggered an awakening of long dormant life patterns that nearly cost him his trading career. 

   The life patterns learned growing up on a small family farm (an unstable one at that) had only gone into remission.  Once they had been activated by life circumstance, he was going to have to deal with them or get crushed by them.  John decided to deal with them.  And the first stop on that journey was to acknowledge them.  Like many men, who have not developed their emotional intelligence, John kept trying to push the encroaching scarcity thinking out of the way by brute force.  That did not work.  Then he tried reprogramming the unconscious mind by using affirmations and visualizations.  That reprogramming stuff did make him “feel” better.  But when subjected to the stress of risking capital and being evaluated by his firm, the “feeling good” of believing that he was reprogramming his unconscious mind for success in trading and life simply crashed and burned.  The “feeling of success” he conjured up did not transfer into performance when under the challenges of facing real risk.

Retraining the Brain and Mind for Performance, Not Outcome

   The big break for John came when he finally acknowledged that he could not control outcome.  He could not control whether he won or lost.  He wanted to win because it (the winning) made him “feel” good.  The problem with focusing on winning though is, first, you do not control whether you win or lose in trading.  It’s all probability – and the brain does not like that.  The second problem with winning is the “feeling good” that comes along with it.  That feeling good is simply an emotional state called euphoria (built for short term success celebration) that causes you to believe that the good times are going to roll on forever.  This is a very bad emotional state from which to trade.  Only disciplined impartiality is good for long term success in trading.

   John had to learn how to manage the tendency to feel “good” when he won at trading.  And he also had to really examine his beliefs about losing.  (Which was big for him because his family lost the farm.)  Losing was bad in his mind.  As he developed his psychology of trading though, he learned that losing was simply landing on the wrong side of probability relative to him.  He could not control whether he won or lost.  But what he could control is the mind he brought into the performance of trading.  This he could control.  His inner Caveman had to roll over and make way for a modern man.  Winning nor losing was not the object in trading.  Performance was.  As he grew into this new mindset, his trading took off. 

   He recognized that the taste and meaning of losing had come, in large part, from his family having lost the farm.  That was a big event.  And he had to grieve it properly.  As he did, he was freed from the fear of losing that was at the core of his scarcity thinking.  He was afraid of “losing the family farm” again, again, and again as he traded.  By freeing himself of his past, he was able to embrace the new reality of controlling his performance rather than the futility of trying to control outcome.  The limbic learning and meaning behind the emotional pattern had been transformed.  He allowed the loss of the family farm to drift off into the past without fighting it anymore.

   Better yet, he was freed from this aspect of his past and was able to focus on the mind he brought into the moment of trading performance.  This he could control.  And by becoming comfortable with what he could control, he found his edge again and trusted his methodology to stay in his trades once they became profitable, until they hit targets.  His mind was rebuilt for probability management rather than being ruled by the limbic learning of the past.

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