Behaviors That Almost Guarantee Failure
Daniel Kahneman, a Princeton professor was the first psychologist to win the Nobel Prize in Economics. He studied the intellectual underpinnings of investing to prove how often we act from the mistaken belief that we know more than we actually do.
He also determined in his studies that people dislike losses so much that they make irrational decisions in vain attempts to avoid them. This helps explain, despite the wisdom of some of the truly great traders, why people sell their winning stocks too early, and hold on to their losers for too long. It’s human nature to take the profit on the often mistaken assumption that it will not last for too long.
Interestingly this is the exact opposite in thinking to the successful trend followers (a topic of discussion begun two weeks ago) over the years that concentrated on cutting their losses short while letting their profits run.
There are a number of behaviors that will almost guarantee losses in the markets. These behaviors are the antithesis of the way trend followers operate:
- Lack of Discipline – Too many would rather listen to the advice of others than take the time to learn for themselves. People are lazy. Think about the Madoff scandal – people wanted to believe.
- Impatience – an insatiable need for action – the gamblers high.
- Greed : Hoping to pick tops and bottoms to maximize their profits.
- No Objectivity : We marry our positions.
- Impulsive behavior : Jump into the market based on a story in the morning paper or earnings announced after the close.
- Inability to stay in the present: You can’t spend your time thinking about how you’re going to spend your profits.
- False Parallels: Believing that just because the market behaved one way in 1995 it does not mean a similar patter today will give the same results.
Information for today’s posting has been gathered from the book, Trend Following, by Michael Covel, Chapter 6 -Human Behavior. I hope it helps