Your Winning Personality
An article of faith in stock trading is that you need to cut your losses and let your profits run.
Funnily enough, most people do the opposite and end by blowing up their trading accounts.
Imagine you’re playing a game – let’s say it’s a very advanced version of Monopoly – and you reach a square where you have a choice of directions.
One way offers you an 80% chance of winning $4,000.
The downside is that there’s a 20% chance of winning nothing. The other way offers you a guaranteed $3,000. Which path would you follow?
Having chosen your path – you have chosen one, right? – if you haven’t, go back and choose now, you then move on and you come to another choice of paths.
One path gives you an 80% chance of losing $4,000 and a 20% chance of losing nothing. The other way offers you a guaranteed loss of $3,000. Which path would you follow?
If you’re like most people, you’ll choose the guaranteed $3,000 win at the first choice of paths and then you’ll choose the path that gives you an 80% chance of losing $4,000 and a 20% chance of losing nothing at the second choice of paths.
Most people choose certainty when they’re winning but, when losses seem likely, they prefer gambling.
If your choices were different from most people, well done. You’ve done something intuitively that a lot of stock traders need to learn to do (against their true instincts).
Two academics, Daniel Kahneman and Amos Tversky carried out a series of experiments where people were given choices of winning or losing money under different circumstances.
They discovered that because people really hate losing, they will usually try to gamble their way out of a losing position.
Similarly, people love winning and when they have a chance of winning, they don’t want to gamble with their winning position.
These instincts crush a lot of newbie traders.
Remember, to be a successful trader, you’ve got to take guaranteed losses and gamble with winning positions – in other words, you’ve got to cut your losses and let your profits run.
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