Chapter 1-3: The Cruel Reality of the Market ~The Only World Where Effort Is Not Rewarded~

In the 1st and 2nd installments, I talked about the market paradox where effort is betrayed, the hell I experienced during the IT bubble, and the futility of the "Holy Grail chase."

Continuing in this installment【Episode 3: Prospect Theory ~ Humans are programmed to lose ~】, we delve into why having knowledge still doesn’t lead to victory, the root "brain bugs," and the real state of the market as shown by cold statistics.


【Episode 3: Prospect Theory ~ Humans are programmed to lose ~】

The true nature of “I know it, but I can’t stop”

“Cut losses early, let profits run (losses small, gains large).”

If you open the investing textbook, you’ll see this proverb on the very first page. It’s a logic simple enough for elementary school students to understand. Yet, how many traders in this world can execute it perfectly?

Many people blame themselves for having weak willpower or immature mentality, saying they cannot cut losses.

But the reality is even crueller. At the level of our survival instinct, humans are “programmed to lose in the market.”

What scientifically proves this is the core of behavioral economics, the “Prospect Theory.”

This theory, proposed by Daniel Kahneman and others in 1979, laid bare how irrational our brains can be.

Imagine this.

Before you, there are two options. A: You receive 1,000,000 yen unconditionally. B: You flip a coin; if heads, you receive 2,000,000 yen, if tails you receive nothing.

Many people choose “A” to secure a sure profit, even though the expected value for both is the same: 1,000,000 yen.

Now, how about this scenario?

You currently owe 2,000,000 yen. A: Your debt is unconditionally reduced to 1,000,000 yen (loss of 1,000,000 yen is guaranteed). B: Flip a coin; if heads, the debt becomes zero; if tails, you still owe 2,000,000 yen.

This time, many people choose “B.” Unable to bear the pain of locking in a loss, they gambling on a big win.

What does this trigger in the market?

When there’s unrealized profit, people fear losing it and close early (small gains); when there’s unrealized loss, they cling to baseless hope that it will come back and leave it, ultimately taking irreparable damage (large losses).

In short, trading by following human instincts means the equation “you will surely lose” holds true.

Your losses prove you are a normal human being; in the market, that normality is a fatal flaw.

The devilish substance that controls the brain

What distorts our trading isn’t Prospect Theory alone; the chemicals released in the brain are another invisible enemy that hinders calm judgment.

When trades go well and profits accumulate, testosterone floods the brain. This hormone boosts confidence and stimulates the hunting instinct, but when excessive, it makes people arrogant.

Sensitivity to risk dulls, unfounded omnipotent confidence takes over, and traders raise lot sizes recklessly toward ruin.

Conversely, when losses pile up and drawdowns are in full swing, the brain is governed by the stress hormone cortisol.

When this accumulates, people become irrationally fearful.

Even in situations proven to be opportunities through validation, past pain flashes back and fingers stop moving. Or, driven by the urge to escape that stress, they indulge in reckless “prayer trades” that ignore the rules.

The market is a gigantic “mental laboratory” where such human desires and fears collide at the hormone level.

Even if you think you are judging calmly in front of the monitor, you may actually be a marionette controlled by the brain’s chemicals.

“The 90-10 Rule”: The losers support the winner’s chair

Here, let me tell you about the widely-spoken in the investment industry “90-10 rule.”

This is the terrifying statistic that 90% of market participants will lose 90% of their assets within 90 days.

When I saw the account data of a secretary at a securities company I know, I was speechless at its cold calculation.

In one year, only a few percent managed to increase their account balance by even 1 yen. The remaining more than 90% throw their carefully saved funds into the market’s enormous shredder.

Why do so many people lose?

Because the market is a zero-sum game (or minus-sum after fees), and someone’s profit always comes at someone else’s loss.

When you press the order button, there is always an opposing trader on the other side.

When you buy believing prices will rise, your counterpart sells believing they will fall.

Who is that counterpart? A neighbor housewife? Or a Goldman Sachs pro dealer who earns billions and commands the latest algorithms?

Beginners exit the market without understanding why they are losing, while the 10% of “the haves” quietly and surely siphon off their funds.

They do not harbor emotions; they rely on statistical advantage and patiently set their nets.

If you look at a chart now and feel “it seems like it will go up,” you are undoubtedly on the 90% “sucker” side. That vague feeling is precisely the lure professionals prefer.

The slow-acting poison named “Grain of Luck”

Beginner traders should be most wary of not “losing” but “accidentally winning.”

Markets contain random price movements, so an amateur who trades like throwing darts can sometimes win for a while.

I call this “Luck,” and I believe it is the greatest poison shortening a trader’s life.

Those who win by luck mistake their success for skill or market sense. Then they neglect proper testing and money management, raise living standards, and push leverage to the limit.

The brain remembers the pleasure of easy money and cannot return to steady work or careful validation.

However, the market is not that forgiving to those who rely on luck alone.

When the inevitable convergence of probabilities starts a losing streak, they lack the mechanism and logical justification to endure it. As a result, they incur losses several times the profits gained by luck and disappear with debt.

“Win or lose by luck.”

If you get caught up in every win and loss, clenching fists or burying your head, you are still treating the market as a gamble rather than as a serious endeavor.

Giving up instinct, becoming the machine’s “servant”

From what we’ve discussed so far, you can see how unnatural and cruel the market is for humans. Efforts go unrewarded, the brain lie, statistics predict your defeat.

So must we resign to despair?

No, there is a solution. It is to completely eliminate the uncertain element of yourself from trading.

The conclusion I reached is extremely simple.

“My thoughts and view of the market are worthless. I will simply follow validated probabilities (edge) and function as part of the machine.”

In the final installment of Chapter 1, I will discuss how I killed emotions and built a system to trade like a craftsman in a small town workshop, outlining the first step toward a turnaround.

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