To Succeed in Investing, Don't Become Fixated by Your Own Success
What follows is a true and factual story. A University in the US did an experiment to understand more about the psychology of success. This experiment has subsequently been repeated a number of times at different places and by 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.
On probability, if the coin is tossed you have a 50% chance of guessing correctly which way it will end up. The experiment required 500 tosses of the coin and the outcome followed the laws of probability of around half of the tosses producing a correct guess. This probability outcome is fairly well understood by the experiment subjects, and people generally.
However, within the 500 tosses you will have a good chance of stringing together a number of tosses in a row that you will guess correctly. This is where the psychology of success comes into effect. The experiment asked it's subjects how they felt about their performance in tossing the coin and guessing the correct outcome at various times during the experiment.
What the experimenters discovered was that when people were having successful runs - four or five or six correct guesses in a row - they developed a belief that their own skill and expertise was responsible for this success. Reasons stated included: I am now concentrating harder and that is improving my performance, I am getting better at this; through to, I have developed the skill of how to guess a coin toss more accurately.
Remember that all these people taking part in the experiment know that the outcome of a guess is based on a 50% probability outcome. Yet these same rational and normal people believe that when they guess a few coin tosses in a row correctly that it is due to their own talent and ability. The psychology of the brain is a scary thing.
The same contradiction happens with traders and investors all the time when trading or investing in the stock market. This is especially observable with new traders and investers. The trader/invester may grow to believe they have "special talents" after a string of winning trades. This may make the trader/invester believe that they are somehow better, or have a special talent for trading, whereby their success has really only been because of probable "chance".
Before long, the investor or trader's belief in their own superior ability begins to result in over confidence - trading too many stocks or trading without properly managing the risk. And the next thing that happens is the Market Slap! The stock market has a nasty habit of slapping down over confident traders with a big loss.
The truth here is that every trade involves risk and every trader should be managing risk. This means protecting your capital and not getting carried away with your successes. Beware the Market Slap! - 23217
The experiment asked people (experiment subjects) to guess the outcome of tossing a coin and measured how many times they guessed correctly and incorrectly.
On probability, if the coin is tossed you have a 50% chance of guessing correctly which way it will end up. The experiment required 500 tosses of the coin and the outcome followed the laws of probability of around half of the tosses producing a correct guess. This probability outcome is fairly well understood by the experiment subjects, and people generally.
However, within the 500 tosses you will have a good chance of stringing together a number of tosses in a row that you will guess correctly. This is where the psychology of success comes into effect. The experiment asked it's subjects how they felt about their performance in tossing the coin and guessing the correct outcome at various times during the experiment.
What the experimenters discovered was that when people were having successful runs - four or five or six correct guesses in a row - they developed a belief that their own skill and expertise was responsible for this success. Reasons stated included: I am now concentrating harder and that is improving my performance, I am getting better at this; through to, I have developed the skill of how to guess a coin toss more accurately.
Remember that all these people taking part in the experiment know that the outcome of a guess is based on a 50% probability outcome. Yet these same rational and normal people believe that when they guess a few coin tosses in a row correctly that it is due to their own talent and ability. The psychology of the brain is a scary thing.
The same contradiction happens with traders and investors all the time when trading or investing in the stock market. This is especially observable with new traders and investers. The trader/invester may grow to believe they have "special talents" after a string of winning trades. This may make the trader/invester believe that they are somehow better, or have a special talent for trading, whereby their success has really only been because of probable "chance".
Before long, the investor or trader's belief in their own superior ability begins to result in over confidence - trading too many stocks or trading without properly managing the risk. And the next thing that happens is the Market Slap! The stock market has a nasty habit of slapping down over confident traders with a big loss.
The truth here is that every trade involves risk and every trader should be managing risk. This means protecting your capital and not getting carried away with your successes. Beware the Market Slap! - 23217
About the Author:
Looking to find the best share trading course, then visit Just Shares to find the best advice on how to trade shares and share trading education.
posted by X - Men @ 2:26 AM
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