How to Deal with Success in Investing
What follows is a true story. A US University completed an experiment to learn more about the psychology around the subject of success. Subsequent to the initial experiment, similar experiments have been repeated many times at different places and by many 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.
The experiment involved tossing the coin 500 times and the law of probability says that you would guess right around 250 times or 50% of the time. This outcome is the same no matter how high or how low your IQ is, no matter where you went to school or how much you have studied the art of coin tossing. Just about everyone understands this and knows it.
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.
Yet this happens with people investing in the stock market all the time - especially people new to investing and trading. After a winning trade or two or three, the investor or trader begins to believe that they have a special "talent" for stocks and shares. They begin to believe that they are naturally better than the average trader.
The outcome, before too long, is that the investor's belief in their own ability results in over confidence. This over confidence results in trading too many stocks or trading without managing the risk inherent in any trade. Unfortunately the stock market has a nasty habit of slapping down over confident traders with a big loss.
The lesson to be learnt here is that every trade or investment involves risk and that every trader needs to manage the risk in every trade. This means not getting carried away with your successes and protecting your capital every step of the way. Beware the Market Slap! - 23200
The experiment asked people (experiment subjects) to guess the outcome of tossing a coin and measured how many times they guessed correctly and incorrectly.
The experiment involved tossing the coin 500 times and the law of probability says that you would guess right around 250 times or 50% of the time. This outcome is the same no matter how high or how low your IQ is, no matter where you went to school or how much you have studied the art of coin tossing. Just about everyone understands this and knows it.
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.
Yet this happens with people investing in the stock market all the time - especially people new to investing and trading. After a winning trade or two or three, the investor or trader begins to believe that they have a special "talent" for stocks and shares. They begin to believe that they are naturally better than the average trader.
The outcome, before too long, is that the investor's belief in their own ability results in over confidence. This over confidence results in trading too many stocks or trading without managing the risk inherent in any trade. Unfortunately the stock market has a nasty habit of slapping down over confident traders with a big loss.
The lesson to be learnt here is that every trade or investment involves risk and that every trader needs to manage the risk in every trade. This means not getting carried away with your successes and protecting your capital every step of the way. Beware the Market Slap! - 23200
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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 @ 7:05 AM
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