Locus of Control: The Roots of the Blame Game

Key Points:

1. Locus of control is a psychological concept that affects traders’ perception of control over their trading outcomes.
2. Traders with an internal locus of control tend to be more proactive, resilient, and confident.
3. Shifting towards an internal locus of control can enhance trading performance and decision-making.

Most traders focus heavily on charts and technical analysis, often overlooking the psychological principles that could give them a competitive edge. One of these critical principles is the locus of control, a concept first introduced by psychologist Julian B. Rotter in 1954. This principle reveals how individuals perceive their ability to influence events and outcomes, profoundly affecting their behavior, decision-making, and overall success in trading.

In trading, having a strong internal locus of control, where individuals believe their actions directly impact their success, can be incredibly empowering. Traders with this mindset are more likely to engage in diligent research, maintain discipline, and continuously improve their strategies, leading to better performance and resilience during market volatility. For instance, a trader who attributes a loss to their lack of research is likelier to learn from the experience and make necessary adjustments.

However, while the locus of control can be a powerful tool in trading, its utility can diminish in other areas of life if not balanced correctly. For example, an individual with an excessively strong internal locus of control might struggle with accepting situations beyond their control, leading to frustration and unnecessary stress. This imbalance can result in unrealistic expectations and a tendency to blame oneself for events outside influence.

Moreover, overemphasizing internal locus of control might hinder effective communication and cooperation in personal relationships or collaborative work environments. A person who believes they can and should control every aspect of an outcome may inadvertently disregard the contributions and perspectives of others, leading to conflicts and a lack of synergy. In these contexts, understanding the value of an external locus of control—recognizing and accepting external factors and the role of chance—is crucial for maintaining healthy, realistic, and collaborative interactions.

Types of Locus of Control:

Internal Locus of Control: Individuals with a high internal locus of control believe that their actions directly impact outcomes. These people are often self-motivated, confident, proactive, and resilient. They attribute success or failure to their efforts and abilities, making them more likely to take responsibility for their actions and persist in facing challenges.

External Locus of Control: In contrast, individuals with a high external locus of control believe that external factors, such as luck (News), fate (Data), or other people (Powell), influence their outcomes. They tend to attribute success or failure to outside influences beyond their control, leading to passivity, helplessness, and anxiety. These individuals may feel overwhelmed by challenges and are less likely to take proactive steps in their personal and professional lives.

Impact on Behavior and Trading Outcomes:

The locus of control significantly impacts various aspects of life, including trading. Traders with an internal locus of control often achieve higher levels of success, take responsibility for their actions, and maintain better mental and physical health. Conversely, traders with an external locus of control may experience higher stress and anxiety levels and are less likely to engage in healthy trading behaviors or take proactive steps in their trading strategies.

“The greatest discovery of my generation is that a human being can alter his life by altering his attitudes.”

– William James

Applications in Trading:

Internal Locus of Control: Traders with an internal locus of control believe their actions directly impact their trading outcomes. This mindset fosters proactive learning, better risk management, and resilience in the face of losses. They continuously seek to improve their skills and knowledge, implement risk management strategies, and view losses as learning opportunities.

External Locus of Control: Traders with an external locus of control attribute their successes or failures to outside factors like market conditions or luck. This perspective can result in a passive approach, blame-shifting, and lower confidence. These traders might not take active steps to improve their trading strategies, relying more on external factors, affecting their decision-making and emotional stability.

Measuring Locus of Control:

The Rotter Internal-External Locus of Control Scale and the Multidimensional Health Locus of Control scales are tools for measuring the locus of control.

Critiques and Considerations:

While valuable, the locus of control concept has its criticisms. Some argue it oversimplifies human behavior and environmental interactions, as locus of control can vary across different life domains and is influenced by cultural factors. Additionally, the reliability and validity of measurement tools like the Rotter Scale have been questioned. Critics also point out the potential overlap with attribution theory, which suggests that individuals attribute their successes or failures to internal or external factors. This overlap can influence trading behavior, as traders may attribute their profits or losses to their skills or market conditions, affecting their confidence and decision-making.

CLEAR Mindset Connections:

Connect: Focusing on the present moment can help traders understand their locus of control in various situations, enhancing their ability to act effectively.

Respond: Shifting towards an internal locus of control encourages decisive, informed actions, transforming trading challenges into opportunities for growth and improvement.

Act Accordingly:

Understanding and leveraging the concept of locus of control can significantly impact personal development, therapeutic practices, and organizational management. By developing a more internal locus of control, traders can achieve better outcomes in various aspects of their professional lives, fostering a sense of agency and resilience.

Actionable Strategies:

1. Engage in Regular Self-Reflection: Take weekly time to reflect on your trading successes and failures. This practice enhances self-awareness and helps you understand your role in each decision, enabling you to refine your strategies effectively.
2. Set Specific, Achievable Goals: Break down your trading objectives into smaller, actionable steps. This approach makes it easier to track progress, stay motivated, and achieve your larger goals systematically.
3. Focus on Controllable Factors: Direct your energy towards actions and responses you can control, such as trading strategies and psychological preparation, rather than market fluctuations or external variables beyond your influence.
4. Commit to Continuous Learning: Stay updated on market trends and developments. Regularly seek new educational resources and training opportunities to enhance your trading skills and knowledge.
5. Solicit and Utilize Feedback: Actively seek constructive feedback from mentors, peers, or through trading platforms. Use this feedback to adjust your trading strategies, fostering continual improvement.

Citations:

1. Rotter, J.B. (1954). “Social Learning and Clinical Psychology”
2. Phares, E.J. (1976). “Locus of Control in Personality”
3. Dawson, E. A., West, M. A., & Nielsen, K. (2022). Work engagement, psychological capital, and safety behaviors in safety-critical industries. Frontiers in Psychology, 13, Article 9273068. https://www.ncbi.nlm.nih.gov/pmc/articles/PMC9273068/
4. Wallston, K.A., Wallston, B.S., & DeVellis, R. (1978). “Development of the Multidimensional Health Locus of Control (MHLC) Scales
5. Lefcourt, H.M. (1991). “Locus of control”