From the "God Effect" to Vengeance Trading: What Does Science Say About Ego Traps?

Most traders think their biggest enemy is an investment bank's algorithm or market manipulation. Wrong. The most dangerous enemy is sitting between your ears.

Cognitive psychology has identified dozens of cognitive biases that cause intelligent people to make idiotic financial decisions. Two of them are particularly deadly because they act like a seesaw: one lifts you to the sky, only to be tossed off the edge by the other.

Here's the anatomy of the "God Effect" and "Vengeance Trading"—from your brain's perspective.

1. The God Effect (Illusion of Control) – When You Confuse Luck with Genius

In psychology, this phenomenon is called Illusion of Control and the Attribution Error .
When you win, your brain automatically attributes the success to your skills (“I'm a great analyst”). When you lose, you blame external factors (“The market was rigged”).

Neurobiological Mechanism:
After a series of successful trades, your testosterone and dopamine levels spike. This phenomenon is called the "Winner Effect" in financial literature . Research conducted on
traders in the City of London (including by Dr. John Coates) has shown that elevated testosterone increases confidence and risk appetite.

• The problem: Your brain, in a chemically high state, stops perceiving threats. You start to believe you have the "golden touch."

• Symptom: You increase your position (leverage), ignore stop losses, enter trades "on feel".

• The result: The market finally changes, but your brain still plays by the old rules. The crash is painful because you're facing reality at maximum risk.

The Scientific Antidote:
Understand Regression to the Mean . In statistics, extreme results (both gains and losses) always converge to the mean over time. Your brilliant streak is most likely a statistical outlier, not the new norm. When you feel "indestructible," cut your bet in half.

2. Revenge Trading – Why do you want to punish the market?

When the "God Effect" ends in a painful loss, the pendulum swings back. You enter the zone of Revenge Trading .
Psychologically, it's a desperate attempt to regain lost control and repair a bruised ego.

Neurobiological Mechanism:
Financial loss is processed in the same brain regions as physical pain and fear (the amygdala and insula).
However, the reaction to this pain can be surprising. Instead of withdrawing, you enter a state known in behavioral psychology as "loss chasing .

• When you lose money, your prefrontal cortex (logic) is “switched off” by strong emotions.

• A primitive fighting mechanism kicks in. You want to immediately reclaim what's "yours.".

• Interestingly, research shows that people facing a loss are willing to take enormous risks just to get back to zero. This is why you double your bet after a loss (martingale strategy), which statistically leads to bankruptcy.

Why is this a trap?
The market has no personality. It doesn't know you've lost. It doesn't know you're out for revenge. By treating the chart like an enemy you have to settle a score with, you're tilting at windmills. You're acting on impulse (System 1), not analysis (System 2).

The scientific antidote:
Apply the principle of a Forced Cognitive Break . Research shows that emotions have a half-life. It takes about 20-30 minutes for your brain chemistry to return to balance after a stressful event.
If you suffer a major loss, step away from the computer. Physically. Don't make decisions until your heart rate returns to normal.

Summary: Ego is the most expensive broker

Both of these traps—the "God Effect" and "Revenge"—have a common denominator: Ego .
It's your ego that wants to feel important (when you win) and it's your ego that doesn't want to admit you're wrong (when you lose).

Professional trading is about eliminating ego from the equation.
As research on trader effectiveness suggests, the best investors aren't those with the highest IQ, but those with the highest emotional control. They treat profits and losses as raw data, not as an assessment of their value as people.

Want to stop falling into these traps? Stop treating trading like a fight for honor. Start treating it like a boring business based on statistics.