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 involved getting people to guess the outcome of tossing a coin. You know how it goes, I toss the coin, you guess the outcome and then you are either right or wrong.
Let me ask you a question, if the coin were tossed 500 times how many times would you expect to guess the outcome correctly? That's right around 250 times or 50% of the time. It doesn't matter how clever you are or hard you concentrate the outcome is determined by the laws of probability. Just about everyone understands this and knows it.
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 they found was that when people were having successful runs - four or five or six correct guesses in a row - that they believed that they themselves were responsible for this success. Reasons ranged from, I am getting better at this, to I am now concentrating harder and that is improving my performance.
Remebering that the experiment subjects were fully aware of the law of probability at work in the experiment, with a likelihood of 50% of the outcomes being correct and 50% of the outcomes being incorrect, but believed that their talent and/or ability was attributing to their success. Quite disturbing in its contradiction.
The same contradiction happens with traders and investors all the time when trading or investing in the stock market. This is especially observable with new traders and investers. The trader/invester may grow to believe they have "special talents" after a string of winning trades. This may make the trader/invester believe that they are somehow better, or have a special talent for trading, whereby their success has really only been because of probable "chance".
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 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!
The experiment involved getting people to guess the outcome of tossing a coin. You know how it goes, I toss the coin, you guess the outcome and then you are either right or wrong.
Let me ask you a question, if the coin were tossed 500 times how many times would you expect to guess the outcome correctly? That's right around 250 times or 50% of the time. It doesn't matter how clever you are or hard you concentrate the outcome is determined by the laws of probability. Just about everyone understands this and knows it.
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 they found was that when people were having successful runs - four or five or six correct guesses in a row - that they believed that they themselves were responsible for this success. Reasons ranged from, I am getting better at this, to I am now concentrating harder and that is improving my performance.
Remebering that the experiment subjects were fully aware of the law of probability at work in the experiment, with a likelihood of 50% of the outcomes being correct and 50% of the outcomes being incorrect, but believed that their talent and/or ability was attributing to their success. Quite disturbing in its contradiction.
The same contradiction happens with traders and investors all the time when trading or investing in the stock market. This is especially observable with new traders and investers. The trader/invester may grow to believe they have "special talents" after a string of winning trades. This may make the trader/invester believe that they are somehow better, or have a special talent for trading, whereby their success has really only been because of probable "chance".
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 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!
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