Psychology 01 (Nov 08 - Jan 14)

[winston]

Study: $90 wine tastes better than the same wine at $10

That's why people buy stocks after it has run up

[kennynah]

$90 wine tastes better than the same wine at $10

一个价钱 ， 一份货

3 for $10 durians cannot be better tasting than $12/kg 猫山王

[millionairemind]

The Importance of Being Tall
Here's another of life's fun facts that you can't do anything about: Tall people make more money.

The latest study, in Australia, found that being 6-feet tall raises annual income nearly $1,000 compared to men two inches shorter.

Why?

"Taller people are perceived to be more intelligent and powerful," according to the study, published recently in the Economic Record.

If that is so, then chalk it up to another of implicit associations we make in life. Associations are basically mental shortcuts, (or prejudices, if you like)that help us hack through life's jungle of information. For instance, if we are told a wine is from North Dakota (instead of California) we turn up our noses. If a pain pill is red or black (colors we associate with power) we rate it as being more effective than one colored white.

And now we learn that if someone is tall, we apparently associate their height with brains and brawn.

"Our estimates suggest that if the average man of about 178 centimeters [5 feet 10 inches] gains an additional five centimeters [2 inches] in height, he would be able to earn an extra $950 per year - which is approximately equal to the wage gain from one extra year of labor market experience," said study co-author Andrew Leigh, an economist at the Australian National University.

Associations, of course, can lead us into all sorts of erroneous judgments. A white pain, for instance, pill can be just as effective as a black one. And a tall man can be as dumb as a short one. (Though I must admit, I've never had a good wine from North Dakota.)

But before the tallest among you (at least the tallest Americans among you) start counting your blessings, consider this: For more than two centuries, until World War II, Americans had been the tallest people in the world. But in the 1950s, Americans' heights stabilized. In most of Europe, though, heights have rapidly increased.
http://www.whywemakemistakes.com/2009_0 ... chive.html

[millionairemind]

TUESDAY, JANUARY 6, 2009

Got a gift card for Christmas? Too bad.
Gift cards are the No. 1 gift choice these days: two-thirds of Americans say they plan to buy one. But nobody uses them (well, almost nobody). On average, we each have between three and four gift cards lying unused in wallets, purses and dresser drawers. And these add up: each year, Americans lose about $8 billion through unredeemed gift cards.

That's bad for us -- but great for the companies that issue them. Not long ago, Limited Brands, parent company of the Victoria's Secret chain of lingerie stores, reported a quarterly pretax gain on unused gift cards of $47.8 million, or 8 cents a share (talk about a panty raid!). And they're not alone. Big retailers like Target, Best Buy and Home Depot also make a killing on the cards. One mall owner even allegedly charged fees on unused gift cards, so that by the time shoppers got around to using the card, it was worth less than they expected.

Here's where the mistake comes in: when it comes to predicting future behavior, we think we (and others) will act more virtuously than we end up acting. This behavior is so predictable that researchers have a name for it: projection bias.

There's lots of research demonstrating this, as well as much real-world experience (Busted New Year's resolutions, anyone?). One long-term study tracked high school students who smoked cigarettes. Only 15% of light smokers (less than one cigarette per day) thought they would still be smoking in five years -- but, five years later, 43% of them still were. Researchers have found similar results when it comes to the food we eat and the movies we watch: in the future we think we'll eat healthier food and watch high-brow movies. But today we end up eating junk food and watching trashy movies.

[kennynah]

Greed, Fear and Arrogance
1Mar2010 1740h +8 GMT)
by kennynah

Very often, the novice trader/investor enters a trade, giving it plenty of upside potential and insufficient attention to downside risks. This is a very natural, afterall, who ever enters a trade hoping for the worst to happen.

Still, the way to winning in the long run, is really to foremost measure the downside risks to every single trade before the proverbial counting of the chicks before the eggs hatch. It is counter intuitive but a necessary skill that every trader/investor must first acquire, if there is to be a chance of winning in this investment game. Simply put, learn how to lose before learning how to win.

To tackle this issue of learning how to lose effectively, one must come face to face with our emotions that accompany our trading/investing journey. We are humans, and as such, we are emotional beings. To imagine that we can truly remove emotions within ourselves is not realistic. Still, trading/investing while we are emotional can only hurt us more than benefit us. Thus, how then can we ever hope to resolve this conundrum within.

The simple answer is that we don't try to remove these emotions but manage them; the Fear, the Greed and the Arrogance within us. I am suggesting that trying to isolate such humanly features will be similar to attempting to stop breathing. We will suffocate. We just cannot hope to remove our humanly emotions. It is just not possible.

But we can successfully harness these emotions to our very benefit. We just need to first recognize them and come to accept what these emotions do to our trading/investing habits.

Let's begin with Greed.

How often do we allow winning trades turn into losses, only because we refuse to take profits off the table. How often, do we impose our beliefs that the market ought to reap us more profits than it would. It may not surprise you that often times, we allow Greed to dictate our trading/investing approach.

Given that SP500 futures on average move no more than 15 points within a day during low VIX reading, it is unrealistic to expect unrealistic gigantic moves. They do, at times, but we cannot trade based on unrealistic profit targets.

So, instead of allowing Greed to push us into believing that our winning positions can go on gaining, the moment we “feel” Greed creeping in, it is time to be alerted. It is time to quickly evaluate the technical/ fundamental indicators and decide quickly if we should close off the position and take those rewards.

There is nothing worse than turning a winner into a loser. Allow Greed to signal you internally to sit up and look at the market intensely.

What about Fear.

Just like Greed, Fear can work for us, than against us. Fear is nature’s way of keeping us out of dangerous situations. Imagine that you are crossing the road and your attention turned to your ringing mobile. You answer the call and momentarily get totally absorbed in the call, unaware of your surrounding. Suddenly, in the corner of your eye, you see a flash and hear a loud horn.

Chances are, you don’t freeze on the spot, you bolt and run across the road, regardless if it was really an oncoming vehicle speeding towards you. Your instinctive Fear takes over and you react to remove yourself from a precarious situation, even if that was really a tourist flashing his camera and the ice cream vendor on the sidewalk hawking his business. Of course, this is an exaggerated example, but hopefully, you get my drift.

If you get into a position that went adversely against you, you begin to feel Fear. Instead of turning that emotion to Hope; hope that the price will start moving for you, recognize the Fear as a signal for you to bolt out of your position. This feeling of Fear could save your account from certain death. Don’t second guess your instincts.

There are many opportunities for other profitable trades/investments, so long as there is still funds in your trading account. Learn to lose, before you learn to win.

Arrogance is not just a sin, it is a trading flaw.

We may get away with arrogance at work or with friends and family, but in trading, this characteristic will burn your trading account, very unforgivingly.

How do we identify this negative trading habit? It is easier than we imagine.

After we establish our trade, the position suffers a loss. The loss is not as large as to be stopped out by our predetermined loss exit point. We hang on, allowing the market to gyrate as it always does. But there will come a point when our stop loss is reached and if it wasn’t pre-ordered in, such as a hard stop but a mental stop, and we begin to waiver, that’s when we are being obstinate. We are being arrogant.

We refuse to accept that the market is gently informing us that we have been wrong in our original outlook. We begin fighting against the market. We think we can telepathically turn the market around to our favour. We begin moving our mental stop loss exit, again and again, until the pain is so great we exit at a much larger loss than we originally intended.

Therefore, identifying arrogance in its multifaceted forms, such as being too eccentric about our imposed views of the market direction, will help us to realize when we are being obtuse. Arrogance is far worst a trading trait than Fear and Greed combined. Arrogance blinds us from becoming winners but very damaged losers.

Lose the arrogance, by knowing when we have become one.

Good luck !!!

[millionairemind]

Thanks K for an excellent piece



I can identify fully with the FEAR emotion. Whenever I have a loss, I always fear that this small loss will turn into a BIG LOSS that I will not be able to trade for a living.

Hence, I always take my losses when the stop loss is hit just to be able to trade another day

[kennynah]

thanks MM for your kind words... i'm surprised anyone even bothers to finish reading what i write....hahahah...

frankly, i write becos it is educational for me... i am a strong advocator that learning requires :

listening, reading, speaking and writing...engaging all faculties....hence i write...hahaha...

[winston]

Hi K,

Besides Greed, Fear and Arrogance, I think there's also a need to be aware of Ignorance. Many times, I have been caught off-guard because I'm not aware of something outside my realm of knowledge.

Sometimes, it's because I dont even know that such a thing exist. Many times, it's because I dont have adeuate knowledge of that particular subject.

Example:-

I was investing in a Casino company, Nagacorp, listed in HK. It's owned by a Malaysian and they have a monopoly of the gambling business in Cambodia. It's suppose to be a straight sorward business, right ? All cash. What can go wrong ?

Anyway, I have also gambled in so many Casinoes around the world so I would think that I know this topic fairly well, right ?

Well, Nagacorp was hit with a big writedown. Why ? Because they were not able to collect a lot of money from the junket operators.

So Ignorance is also at the back of mind now. This one is the toughest of the 4 emotions. It's very subtle. It's going against our ego. It does not feel right when we tell ourselves that we dont know everything...

We are supposed to be Masters of the Universe now. We are experienced old dogs in this business now. We have already seen most situation. What else do we not know ? That's when it hits you squarely in the face ...

[kennynah]

W : great point... the price of ignorance can be so dear....

i would classify 2 specific areas of ignorance,

knowing ignorance
unknowing ignorance

knowing ignorance is when we are aware of our deficiencies and we seek out answers

unknowing ignorance is when we are not aware of our ignorance... this is an area that we have no total control over...and have to accept that we cannot and will not know everything... this poses as an external and uncontrollable risk....

still, we should try to minimize the risk of "unknowing ignorance" by constantly educating ourselves.

[millionairemind]

Have you ever passed by a restaurant that has a long q outside and wonder if the food is really good?

Then one day you decided to go there early and try it, only to find out the food is so-so... and you wonder what's the buzz all about??

I brought my inlaws to a Thai restaurant last night cos' it always has a long Q within half an hour after opening for dinner.

We went there very early at around 525pm to avoid the q-ing.

After having dinner, both the Mrs. and I wondered "WHATS THE FUSS ALL ABOUT?"

I guess the restaurant owner is clever to "generate" this kind of buzz...and we have fallen into the common psychological trap that "if there is a Q, the food must be good" kind of thinking.