The Biggest Threat to Your Own Investment Success Could be Yourself
What follows is a true story. A US University completed an experiment to learn more about the psychology around the subject of success. Subsequent to the initial experiment, similar experiments have been repeated many times at different places and by many different people.
The experiment asked people (experiment subjects) to guess the outcome of tossing a coin and measured how many times they guessed correctly and incorrectly.
The experiment involved tossing the coin 500 times and the law of probability says that you would guess right around 250 times or 50% of the time. This outcome is the same no matter how high or how low your IQ is, no matter where you went to school or how much you have studied the art of coin tossing. Just about everyone understands this and knows it.
In any 500 tosses there is a fairly good chance that you will put together several runs of guessing five or six tosses in a row correctly. This is where the psychology of success kicks in. The experimenters asked the people guessing the outcome of the coin tosses their opinion on how they felt about their own performance at various times during the experiment.
What they found was that when people were having successful runs – four or five or six correct guesses in a row – that they believed that they themselves were responsible for this success. Reasons ranged from, I am getting better at this, to I am now concentrating harder and that is improving my performance.
Remebering that the experiment subjects were fully aware of the law of probability at work in the experiment, with a likelihood of 50% of the outcomes being correct and 50% of the outcomes being incorrect, but believed that their talent and/or ability was attributing to their success. Quite disturbing in its contradiction.
Yet this happens with people investing in the stock market all the time – especially people new to investing and trading. After a winning trade or two or three, the investor or trader begins to believe that they have a special “talent” for stocks and shares. They begin to believe that they are naturally better than the average trader.
The outcome, before too long, is that the investor’s belief in their own ability results in over confidence. This over confidence results in trading too many stocks or trading without managing the risk inherent in any trade. Unfortunately the stock market has a nasty habit of slapping down over confident traders with a big loss.
So remember, every trade you take has risk which you need to manage. If you manage your risks and enjoy the chance string of winning trades from time-to-time you will be successful and you will avoid the Market Slap!
Category: Finance
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