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Human Psychology's Affects On Grain Marketing

3/3/2017

 
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Since the year is coming to an end, it's important for us to look back on what we've accomplished and how we can improve. So, I read through all our previous articles in effort to find what I thought was most important for farmers to keep in mind for the future. It's not a statistical study or a technological discovery. It's insight into how we all think and how it may be holding us back. If you'd like to learn something about yourself today that could help you become a more profitable farmer, help yourself and invest five minutes in this article.
In our December 5th article, The Crop-Side Difference: Relative Performance (Part 1/2), we compare farmer pricing performance to that of market advisory services as a whole, as well as Crop-Side's performance. The purpose of that article was to identify whether it was worth it for you, the farmer, to keep pricing your own grain, or hire someone else to do it. Well, in that article we referenced an old presentation by our friends at farmdoc that contains the information used as the basis of today's points. Today, we want to focus on the "Potential Psychological Mistakes in Marketing".

​When you're wondering why some farmers or market advisors do better than others, what's the first thing that pops into your head? Do they pay more attention to the charts or know more fundamental figures than you? Maybe they get paid more or their incentives are somehow better than yours. Any of these things could be true, but which is most important? As a Crop-Side team member and a fellow trader, I would argue that the most important factor is how well you know yourself and your habits. Before you start learning about anything else, you must learn about the way you think.
Here are some common psychological limitations that prevent most people from, not only becoming consistently profitable farmers, but consistently profitable traders as well:

1. Anchoring
This is basically the resistance to change because of discomfort. The brain is always trying to take the easy way out. Unfortunately, we'll rationalize anything that makes us feel good, regardless of whether its the most logical thing to do or not.

2. Loss Aversion and Regret
Everyone knows what it feels like to be wrong. But when you lose money because of your actions, it can feel much worse. As a consequence of this, people put off making that pain real. Perfect examples being not realizing trading losses or storing grain at a loss for too long.

3. Fallacy of Small Numbers
Did you hear about that young farmer who made millions his first year because of his marketing plan? Questions like these certainly are inspirational, but don't dive in until you've got all the facts. Relying on very little information or just a few instances can be troublesome.
​
4. Overconfidence

We all know the type who "talks the talk" but has very little if any experience at all "walking the walk". How good are you really at pricing your own grain? Is your "gut" really as reliable as you think? If you find yourself low on proof, you could be suffering from overconfidence.

5. Hindsight Bias
In general, we tend to remember the happy times and forget the sad times. In farming, we tend to remember the high price years, and forget about the down years. Just because it happened that way before, does not mean it will happen the same way again. 

​What to do instead of falling for the psychological traps?

  1. Get the facts on your performance, your peer's performance, & professional's performance
  2. Study your decision making weaknesses of the past
  3. Where ever possible, seek independent views (on advisory services, finances, etc.)
  4. Focus on whole farm profits, not individual pricing decisions
  5. Focus on results over a large number of years
  6. Consider "automated" pricing strategies that you cannot reverse ​

As always, thanks for reading and Happy Holidays from all of us at Crop-Side Marketing!

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*Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results.
Photos used under Creative Commons from AllieKF, Rotherz67,thanks for 1.1 million views........., MojoBaer, pictures of money, ordjuret, smithbetty579, Philip Taylor PT, manoftaste.de, ** RCB **, James St. John, UnitedSoybeanBoard, Leonard John Matthews, voinonen, Scott McLeod, healthiermi