Kruglanski - the need for closure and decision-making - Important for trading

 

If Col Jessup from "A Few Good Men" opined on uncertainty, he would say most investors cannot handle uncertainty. Investors may say they can deal with uncertainty and risk, but they often avoid engaging with the messiness associated with uncertain environments and decision-making. We know this from extensive analysis of people's need for closure. Most like finality and not decisions or actions that are open-ended. Trading decisions are open-ended because with each mark-to-market there is another decision. Each new piece of information requires another decision, hold or fold. In an uncertain world, many will avoid action and wait. Waiting can be the appropriate action but taken to access it will be costly.

The desire for closure has a significant impact on decision-making. This desire can be another explanation for behavioral biases. Someone who needs or wants closure will look at decision-making differently from those who are comfortable with uncertainty. A person who wants closure will likely suffer from regret and may hold losers over winners. A person who wants closure will likely make decisions based on recent information and will not look for more data. Those who embrace uncertainty will be willing to be more open-ended in their use of information. Closure sensitivity will also impact whether someone is willing to change their mind and adjust their decision.

Arie Kruglanski, a well-known psychologist, has extensively studied the problem and has created questionnaires to measure the degree of closure that we may desire. See the Need for closure scale (NFCS). If applied to traders, we can determine whether an individual can be overly sensitive to uncertainty. Those who desire a high degree of order will not do well when markets are volatile or less orderly. 

The use of rules for investment decisions is an attempt to gain closure. Once a set rule is hit, action is taken, and the decision is closed until the next rule is triggered. Just because someone wants closure does not mean he will be a bad investors and someone who is open-ended will not always be a good trader. The important point is that each of us has a different sensitivity to closure and we should account for this sensitivity with our decision-making. Someone who is very closure sensitive should stop and determine whether he is being too hasty with action. Someone who is open-ended should ask whether he has enough information to act as opposed to waiting for more information. 

Determine your sensitivity to closure and adjust your decision-making to account for any bias. You will be a better investor from this process.