Jesse Livermore – Be the trader of your life – Are you human?
“Cut your losses and let your profits run.”
— Jesse Livermore
Cutting losses and letting profits run is the best-known rule in trading, and the least applied. The reason is neurological: our brain flees the immediate pain of a realised loss and grabs the immediate relief of a banked gain — exactly the opposite of what markets reward. This bias has a name: loss aversion.
It’s a phrase every trader knows. Almost nobody genuinely applies it.
Why? Because we are human. And being human, in trading, is often a handicap.
The problem with emotions
Jesse Livermore was one of the most brilliant traders in history. He made fortunes, lost them, made them back. And despite his genius, he succumbed to his own emotions more than once.
This is not a question of intelligence. It is a question of neurological wiring. Our brain is programmed to avoid immediate pain and grab immediate pleasure — which is exactly the opposite of what markets reward.
The trader who cuts their gains too early is relieving anxiety. The trader who lets losses run is hoping to avoid the pain of realising a loss. Both behaviours are perfectly rational emotionally. Both are destructive financially.
The exercise: are you human?
Before reading on, do this exercise honestly. Don’t look for the “right” answer — there isn’t one at this stage. Choose what you would genuinely do.
Exercise 1 — The choice of urns
You must draw one ball from one of these two urns:
Urn A
3 balls worth +€1,000
1 ball worth €0
Urn B
4 balls worth +€700
Which urn do you choose?
Note your answer. Then move on to the next exercise.
Exercise 2 — The choice of urns (losses version)
Same principle, but this time you must draw a ball — and both urns produce a loss.
Urn C
3 balls worth −€1,000
1 ball worth €0
Urn D
4 balls worth −€700
Which urn do you choose?
Note your answer. Now think about it: why did you choose differently (or identically) in the two cases?
What this reveals about your trading
These two exercises are not trivial. They reproduce exactly the psychology at work when you manage a winning or losing position in the markets.
Most people make choices that are consistent with their emotions but inconsistent with their financial interests. Behavioural finance researchers call this loss aversion — a bias described by Daniel Kahneman and Amos Tversky, and for which Kahneman received the Nobel Prize in Economics.
Jesse Livermore had not read Kahneman — he didn’t exist yet. But he had understood through experience what science would formalise decades later.