Emotional Neutrality

DEFINITION of 'Emotional Neutrality'

The concept of removing greed, fear and other human emotions from financial or investment decisions. The goal of emotional neutrality is to remove any weight that emotions may play in the process of making objective financial decisions, so that the best possible decision can be made, in spite of whatever emotions those decisions may trigger.

BREAKING DOWN 'Emotional Neutrality'

The concept of emotional neutrality arises out of the typical human reaction to profits and losses -- investors are typically pleased when their trades produce profits and unhappy when their trades produce losses. However, if investors are able to remove the impact that their emotions have on their trading decisions, proponents of emotional neutrality contend that doing so will result in improved trading performance.

Taking things one step further, some investors adopt what is called a contrarian strategy, in which they attempt to buy securities when everyone else is selling them, and sell securities when everyone else is buying them. The rationale behind this strategy is that if investors are not emotionally neutral, their emotions will impact their trading decisions and thus under- or over-value securities, creating an opportunity for profit for contrarian traders.

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