Here’s the thought experiment: You come home on Friday evening after a hard week at the office, do you…
1. Immediately order a pizza and pig out.
2. Have that pizza on Sunday evening after a few days rest.
Most people go right to number 1.
According to a guest post by Professor Dan Ariely on Tim Ferris’ blog, this is called ego depletion. Basically, there’s a connection between exhaustion and consumption. In this case, when you’re exhausted — a state called “ego depletion” — you tend to be more drawn to bad food choices, like junk food.
“I’ve always suspected that we start each day with a limited number of decision-making points that, once depleted, leave us cognitively impaired. This is part of the reason that automating minutiae, adopting rituals, and applying creativity only where it’s most valuable (e.g. not deciding what to eat for breakfast) is so important to me.”
Ego Depletion and Personal Finance
I’m wondering whether this doesn’t work for bad personal financial decisions. One of the reasons that I’m interested in automated trading is because there are human weaknesses — like ego depletion — that can interfere with trading, investing, and spending.
So, let’s explore how ego depletion may affect your personal financial situation.
Check out this scenario.
You’ve been trading all week long. You’ve been trying to maintain your discipline and set strict stop loss rules. But things are turning south by the end of the week. You see a pretty risky trade brewing.
1.) Cut your losses and re-charge your batteries.
2.) Take a stab at turning a quick win before the week ends.
I’m suggesting that most would take that trade.
Here’s another scenario we probably all can relate to.