There’s a short Danny Kahneman interview at the Daily Beast here. He notes why your best friends may not be your best advisors:
Friends are sometimes a big help when they share your feelings. In the context of decisions, the friends who will serve you best are those who understand your feelings but are not overly impressed by them.
That’s the Kahneman I love to read, profound and interesting. But then he follows with this sentence:
For example, one important source of bad decisions is loss aversion, by which we put far more weight on what we may lose than on what we may gain. (more…)
How do you handle adversity? What do you do when the markets go against you? Do you get angry and defensive or do you stay calm and play offensive?
When the markets go against you, do you overtrade? Do you try to make all of your losses in one deal? Or do you stay calm, take a breather and reevaluate the market?
When our emotions go up, our intelligence comes down. We make bad decisions. We take it personally. Then we start doubting ourselves and we start losing confidence. Then we start losing more and more…
When we stay calm, we can evaluate the market from an objective place. We can see the market for what it is and not what we want it to be. Then we can take a calculated risk.
Retail equity investors in India systematically lose out to other categories of players because they sell the winning stocks too quickly and hold on to the losing stocks too long, says a study.
It found that individual retail investors in India, numbering 2.02 million – largest in the world – consistently chase a zero rate of return on their stock investments when they make decisions themselves.
The study attributed the recurring losses to these type of investors to the ‘disposition effect’ (selling the winning stocks too quickly and holding on to the losing stocks too long) and ‘overconfidence’ (taking credit for good decisions and attributing bad decisions to luck) for three categories of investors separately. (more…)
Systems don’t need to be changed. The trick is for a trader to develop a system with which he is compatible. -Ed Seykota
Traders can make psychological mistakes when trading that can end a trading career very fast. Here are a few examples:
- They take on more risk than they can deal with, stress takes over and they start making bad decisions.
- They become married to a trade, they become stubborn and ignore their stop losses, wanting to be “right” they wait while losses mount.
- Their egos take over their trading. They are more concerned about proving how smart or clever they are than making money. They begin to be more concerned with bragging about their winners than managing their losing trades. It becomes an ego trip that will not end well.
- Their system does not match them, someone who likes fast paced action should not be a long term growth investor and someone who loves investing in growth stocks they believe in should not day trade.
- A trader loses many times in a row so they change systems right before the big pay off. If you have a proven system trade it for the long term benefits.
Here are some solutions: (more…)