| To Succeed in Investing, Don't Become Fixated by Your Own Success |
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| Written by Sam McNeill |
| Tuesday, 20 October 2009 21:37 |
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The following factual story is from a US University experiment to understand the psychology of success. There has subsequently been many repeats of this experiment by different people in different locations.
The following factual story is from a US University experiment to understand the psychology of success. There has subsequently been many repeats of this experiment by different people in different locations. 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. In any 500 tosses there is a fairly good chance that you will put together several runs of guessing five or six tosses in a row correctly. This is where the psychology of success kicks in. The experimenters asked the people guessing the outcome of the coin tosses their opinion on how they felt about their own performance at various times during the experiment. An interesting outcome observed was that subjects who were having a string of successful guesses (say four or more in a row) believed they were actually responsible for this success. The reasons stated ranged from an improvement in their performance at guessing and tossing the coin, through to a belief that by concentrating harder they improved their performance. Let's stop right here. People who know that the outcome of a guess is based on a strict 50% probabilistic outcome believe that when they have a few guesses correct in a row that it is because of their talent and ability. How scary is that. 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. 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. So remember, every trade you take has risk which you need to manage. If you manage your risks and enjoy the chance string of winning trades from time-to-time you will be successful and you will avoid the Market Slap! DISCLAIMER: This article is provided as information only and is not to be taken as financial advice. 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. |