Hi All,
Good to see u today. No forecasting counters tonite. Just sharing a page by Michael W. Covel. Let read...
U see them. Maybe u are the one. Some are so cennected to their Blacberry, they can't imagine it not being in their hand 24/7 (hours/days). Compulsive gaming. Second live. Sparknotes. People are looking at screens, sometimes multiples screens. Some think teaching students to multitask is important for future jobs. Jobs doing what? Serving Ritalin with a splash of Patrons?
Attention deficit disorder is so pervasive, an so ubiquitos, that very few of us even see it as a major concern. People are supremely distracted, and that equals behaviours driven by the moment. Not behaviours purposeful and thought out.
While making a documentary film (brokemovie.com), one of the first places my crew visited was a sheep farm. Those animals were so scared to be separated from the groupit is teribly hard to put their fear into words. Late in the day of the shoot, I got really close to the herd and tried to split them in half. They panicked to reform their group. They had to get back to one cohesive crowd. They made no sounds. Their faces were expressionless. They just moved their feet - ... fast.
Human live to be part of a group too: The group offers safety, confirmation, and simplifies decision-making. Further, if something goes wrong, it is far more comforting to be to be with others than to be alone - the old saying , "misery love company", rings true. However, the successful trader has to be willing to separate from the crowd - to be a contrarian - even though u might always have strong emotional urge to stay with the group.
Additionally, human sheep behaviour is shaped further by a proliferation of electronic goodies. Greed, hope, fear, denial, herd behaviour, impulsiveness and impatience are jacked up on gadget streoids. This is a recipe and foundation for manias and bubbles ad infinitum.
Daniel Kahneman, the first psychologist to win the Nobel Prize in Economics, attributed market manias to investor' illusion of control, callingthis illusion Prospect Theory. He wanted to know: How do people estimate odds and calculate risks? The short answer: Not smartly.
People dislike losses so much that they will make nonstop irrational decision in vain attempts to avoid the pain. This explain why traders, for example, sell winners too early but hold on to losers too long. It is human nature to take profit from a winner quickly on the assumption that it will not last for long, but stick with a loser in the hope it will bounce back.
The typical trader acts on the "law of small numbers" - basing decisions on statistically insignificant examples. For instance, if u buy a fund that has beaten the market three years in a row, it is easy to become seduces that it's on a hot streak. It is hard for us to stop overgeneralizing. Limited empirical evidence is what drives life these days.
Any discussion of why traders are their own worst enemies start with sunk costs. A sunk costs is a cost incurred u cannot retrieve. Although sunk cost should not affect your current decisions, people have a tough time leaving the past. Some will buy more of a losing stock just because their initial decision to buy it. U can say proudly,"I bought on discount!" or "I got it cheap". Of course, if that stocks goes to zero, your theory dies.
Unfortunately, many are ambivalent to sunk costs. Intellectually, u might know that there is nothing u can do about money already spent, but emotionally dwelling on it is standard operating sheep deportment.
An experiment with a $10 tyheather ticket illustrates this. One group of studentswas told to imagine they had arrived at a theater only to discover they had lost their ticket. Would they pay another $10 to buy another ticket? A second group was told to imagine that they were going to a play, but had not yet bought a ticket. When they arrived at the theater, they realized they lost $10 bill. Would they still buy a ticket? In both ticket, the students were presented with the same question: Wouls u spend $10 to see the play? Eighty-eight percent of the second group, which had lost the $10 bill, opted to buy the ticket. However, the first group, the ticket losers, focussing on sunk costs, asked the question differently: Am i willing to spend $20 to see a $ 10 play? Only 46% said yes.
What are some additional behaviours that virtually guarantee losses in the markets?
1. Lack of Discipline. It takes an ccumulation of knowledge and sharp focus to trade successfully. Many would rather listen to the advice of others. They just want to believe, like Fox Mulder.
2. Impatience. Some have an insatiable need for action. The day trading adrenaline rush and the gamblers' high can have heroin-like addiction pull.
3. No Objectivity. Some are unable to disengage emotionally from the market. They create a virtual "lifelong" marriage to their trades. Divorce is not an option.
4. Greed. A desire for quick profit blinds many from dilligent work needed to actually win in the long run.
5. Refusal To Accept The Truth. Some do not want to believe that the only knowable thruth is price action. They feel more secure following cult leaders serving Kool-Aid.
6. Impulsive Behaviour. Many jump into investment based on the morning paper or Good Morning America. Thinking that if u act quickly, somehow u will beat everybody else in the great race is a recoipe of a messy failure.
7. Inability To Stay In The Moment Of Now. To be a successful trader, u cannot spend your time thinking about how are u going to spend your profits. Trading because u have to have money is not workable.
8. Stay Open Minded. Come into the day knowing your future steps. Do not be stubborn when market does not go your way. Cut your losses and follow your stinking trading plan.
9. Avoid False Parallels. Just because the market behaved one way in 1995, 2000 or 2008 does not mean similar pattern today will give u the same result. A great example of this: The Hindenburg Omen. It is a technical analysis pattern that is said no portend a stock market crash. The problem: Sometimes it is right, sometimes not. U don't want to bet your life savings on a coin flip.
Additionally, human sheep behaviour is shaped further by a proliferation of electronic goodies. Greed, hope, fear, denial, herd behaviour, impulsiveness and impatience are jacked up on gadget streoids. This is a recipe and foundation for manias and bubbles ad infinitum.
Daniel Kahneman, the first psychologist to win the Nobel Prize in Economics, attributed market manias to investor' illusion of control, callingthis illusion Prospect Theory. He wanted to know: How do people estimate odds and calculate risks? The short answer: Not smartly.
People dislike losses so much that they will make nonstop irrational decision in vain attempts to avoid the pain. This explain why traders, for example, sell winners too early but hold on to losers too long. It is human nature to take profit from a winner quickly on the assumption that it will not last for long, but stick with a loser in the hope it will bounce back.
The typical trader acts on the "law of small numbers" - basing decisions on statistically insignificant examples. For instance, if u buy a fund that has beaten the market three years in a row, it is easy to become seduces that it's on a hot streak. It is hard for us to stop overgeneralizing. Limited empirical evidence is what drives life these days.
Any discussion of why traders are their own worst enemies start with sunk costs. A sunk costs is a cost incurred u cannot retrieve. Although sunk cost should not affect your current decisions, people have a tough time leaving the past. Some will buy more of a losing stock just because their initial decision to buy it. U can say proudly,"I bought on discount!" or "I got it cheap". Of course, if that stocks goes to zero, your theory dies.
Unfortunately, many are ambivalent to sunk costs. Intellectually, u might know that there is nothing u can do about money already spent, but emotionally dwelling on it is standard operating sheep deportment.
An experiment with a $10 tyheather ticket illustrates this. One group of studentswas told to imagine they had arrived at a theater only to discover they had lost their ticket. Would they pay another $10 to buy another ticket? A second group was told to imagine that they were going to a play, but had not yet bought a ticket. When they arrived at the theater, they realized they lost $10 bill. Would they still buy a ticket? In both ticket, the students were presented with the same question: Wouls u spend $10 to see the play? Eighty-eight percent of the second group, which had lost the $10 bill, opted to buy the ticket. However, the first group, the ticket losers, focussing on sunk costs, asked the question differently: Am i willing to spend $20 to see a $ 10 play? Only 46% said yes.
What are some additional behaviours that virtually guarantee losses in the markets?
1. Lack of Discipline. It takes an ccumulation of knowledge and sharp focus to trade successfully. Many would rather listen to the advice of others. They just want to believe, like Fox Mulder.
2. Impatience. Some have an insatiable need for action. The day trading adrenaline rush and the gamblers' high can have heroin-like addiction pull.
3. No Objectivity. Some are unable to disengage emotionally from the market. They create a virtual "lifelong" marriage to their trades. Divorce is not an option.
4. Greed. A desire for quick profit blinds many from dilligent work needed to actually win in the long run.
5. Refusal To Accept The Truth. Some do not want to believe that the only knowable thruth is price action. They feel more secure following cult leaders serving Kool-Aid.
6. Impulsive Behaviour. Many jump into investment based on the morning paper or Good Morning America. Thinking that if u act quickly, somehow u will beat everybody else in the great race is a recoipe of a messy failure.
7. Inability To Stay In The Moment Of Now. To be a successful trader, u cannot spend your time thinking about how are u going to spend your profits. Trading because u have to have money is not workable.
8. Stay Open Minded. Come into the day knowing your future steps. Do not be stubborn when market does not go your way. Cut your losses and follow your stinking trading plan.
9. Avoid False Parallels. Just because the market behaved one way in 1995, 2000 or 2008 does not mean similar pattern today will give u the same result. A great example of this: The Hindenburg Omen. It is a technical analysis pattern that is said no portend a stock market crash. The problem: Sometimes it is right, sometimes not. U don't want to bet your life savings on a coin flip.
These behaviours all remind us that unlike in the animal world, where a threat passes quickly, humans live in constant stress. For 99% of animals, stress is about 3 minutes of screaming terror and the threat is over. We turn on the exact same stress response when pondering 30-year mortgages. What is quickly emerging as the biggest public-health problemeverywhere? Depression? U want to avoid that fate? Golf legend Jack Nicklaus is famous for saying "Don't be too proud to take a lesson. I'm not. Learn fundamentals of the game and stick to them. Band-Aid remedies never last."
"People take comfort in doing what everyone else is doing,
and if they are wrong, at least they wrong with others.
Happy Reading!!!
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