The Biggest Threat to Your Own Investment Success Could be Yourself
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 is straight forward. It asked people to guess the outcome of tossing a coin. The outcomes are either heads or tails and you guess the outcome and then you are either right or wrong.
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.
What you may not be aware of is that in the 500 tosses there is a fairly good chance that you will put together three or four runs of guessing five tosses in a row correctly. And here is where the psychology of success takes hold. What the university experiment did was asked the people guessing the outcome of the toss how they felt about their performance at various times.
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.
This same effect occurs with people investing in the stock market all the time - and this is especially the case with people new to investing and trading. The investor or trader begins to believe, after a winning trade or two that they have some super "talent" for picking stocks and shares. They begin to believe that they have some natural talent that makes them better than the average trader.
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! - 23310
The experiment is straight forward. It asked people to guess the outcome of tossing a coin. The outcomes are either heads or tails and you guess the outcome and then you are either right or wrong.
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.
What you may not be aware of is that in the 500 tosses there is a fairly good chance that you will put together three or four runs of guessing five tosses in a row correctly. And here is where the psychology of success takes hold. What the university experiment did was asked the people guessing the outcome of the toss how they felt about their performance at various times.
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.
This same effect occurs with people investing in the stock market all the time - and this is especially the case with people new to investing and trading. The investor or trader begins to believe, after a winning trade or two that they have some super "talent" for picking stocks and shares. They begin to believe that they have some natural talent that makes them better than the average trader.
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! - 23310
About the Author:
Want to find out more about share trading education then visit Just Shares' site on how to trade shares successfully with Just Shares Share Trading Course.
posted by Mr. Forex at
6:01 AM
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