Stock Market. Do Not Get the Key to the Mini Bar

When I check into a hotel, I never get the key to the mini bar. Without the key, I don't need willpower to avoid any late-night temptation to devour junk food. I have found that most temptations are better avoided than resisted.

I've noticed that some hotels no longer have mini bars, but instead they lay the food out on top of a table. Thus, the "don't get the key" defense doesn't work. In such cases, I call down to the front desk and have them remove the food.

I once arrived at one such devious hotel so late at night that I wanted to go to sleep immediately and not wait for someone to remove the food. As a partial preventative measure, I put a towel over the chocolate bars and other treats. While I still knew the junk food was in my room, at least I couldn't see it.

As we have seen, our trading instincts are out of sync with stock market opportunity. The investments that feel good are precisely those that are most likely to cost us money, and vice versa. This leads to the paradoxical situation that we sometimes gain by having fewer options. Usually, hav­ ing more options is better, but when our instincts lead us to bad choices— as with junk food in the mini bar or with emotional investing decisions—we can make ourselves better off precisely by limiting our alternatives.

This "less or more" insight into self-control has become closely asso­ciated with the story of Odysseus and the Sirens. On his way home from the Trojan War, Odysseus had to sail past the Island of Sirens . These maidens' song was so beautiful that sailors approached them and were killed as their ships crashed on the rocks surrounding the island.

The goddess Circe warns Odysseus of the danger and provides him with a solution in this passage of The Odyssey:

If any one unwarily draws in too close and hears the singing of the Sirens, his wife and children will never welcome him home again, for they sit in a green field and warble him to death with the sweet­ness of their song . . . but if you like you can listen yourself, for you may get the men to bind you as you stand upright on a cross-piece half way up the mast, and they must lash the rope's ends to the mast itself, that you may have the pleasure of listening. If you beg and pray the men to unloose you, then they must bind you faster. 18

By following Circe's advice, Odysseus survives the Sirens. He has him­self strapped to the mast, and he commands everyone else on the ship to put wax in their ears so that they cannot be tempted by the Sirens. Because Odysseus is unable to control his ship or his men, he hears the Sirens, but is unable to approach their deadly shore. He achieves his goal precisely because he has limited his options. By tying his hands, Odysseus gets what he wants.

Inspired by this story, "mast-strapping" is used in the scientific litera­ture on self-control to explain how having fewer options can sometimes lead to a better outcome. If we didn't have self-control problems, then more options would always be better.

For many traders, financial mast-strapping can be a valuable tool. One of the primary problems in investing is our own desire to trade too much. Almost everyone seems to suffer from this problem, and so do I. Even with all of my knowledge that trading on impulse is bad, I still feel the tug every time I watch a stock market.

Because I like to trade too much, I have done some mast-strapping to constrain my trading. The first thing I did was lock up the bulk of my family's financial assets in a full-service brokerage account that charges $100 a trade. Why pay $100 for something that can be bought for far less? For me, the answer is that $100 works to reduce my costly trading.

Originally, I also kept a small amount in a discount firm's account that charges $5 a trade. When the urge to trade struck me, I would indulge it, but only in this "small account" with the low commissions. This setup prevented me from overtrading most of our money. It was not, however, a perfect solution.

The Waco Kid (played by Gene Wilder) in Blazing Saddles had a sim­ ilar problem to mine. While playing chess with the Sheriff Bart of Rock Ridge (played by Cleavon Little), Wilder says, "I used to be the Waco Kid." The sheriff asks, why "used to be"? In response, Wilder holds out his right hand, which is rock steady. The sheriff says, that looks fine, to which the Waco Kid raises his other arm which is uncontrollably shaky, and says, "yes, but I shoot with my left."

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My first mast-strapping solution still had me doing the equivalent of shooting with my left. I did far too much trading in my "little" account. It didn't cost me any significant money, but I spent so much time on the account that I was probably making minimum wage for my efforts. After about a year of this experiment, I closed the smaller account. This more secure mast-strapping has, so far, been a total success. With no ability to trade cheaply, I haven't traded impulsively.

I suggest that almost everyone, except for the top guns of trading, struc­ture their world so that they cannot trade impulsively. The exact setup will vary for each person. Many people would still trade even at a cost of $100 a trade, so the solution that works for me won't work for everyone.

A pervasive problem with our efforts to improve by mast-strapping is that there's usually someone who would profit from untying us. Just as hotels seek to profit by leaving candy bars on the counter, there will always be firms that are happy to help us trade. We need to be crafty to construct our finances so that we won't be tempted to make bad decisions.

I helped my friend Doug (the millionaire surfer) quit smoking. He agreed that if he smoked even one puff of a cigarette, he would have to pay me $100. Furthermore, immediately after that first puff, he would have to call me to acknowledge defeat. Our agreement was set up for one year, and Doug made it for the entire year without a smoke.

Why did this silly arrangement work to get Doug to quit? The answer is that it tapped into Doug's psyche in the right way. He and I were a bit competitive, and so the prospect of paying me even a nominal sum was loathsome. Furthermore, Doug is honest enough that he wouldn't cheat and lie about smoking. Finally, the need to call and immediately acknowledge defeat was a potent deterrent.

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The right answer for everyone is to avoid emotional trades. The way to accomplish that is to make structural arrangements so that emotional trades are not possible. The details of the correct form of financial mast-strapping will vary for each individual.

Conclusion: Those who trade too much should arrange their finances so that impulsive trades are not possible. Remove temptation; do not expect to resist it.