Are Humans Programmed To Lose: When Right Is Wrong
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Here’s the definition of irony: a statement or situation where the meaning is contradicted by the appearance.
But irony isn’t just a tool for writers at the Onion, or a literary device. It also exists in the world of finance. A trader’s stance to prove his or her correctness by sticking with an unsuccessful trade is perhaps one of the most common ways irony rears its head in finance and is another way humans are programmed to lose. It can be just as devastating as the other money-losing programs of greed and social proof that we talked about earlier this week.
It may sound impossible, but if you trace some of your decisions, you’ll probably find more than a few choices that you made–or didn’t make–were made because countering your previous stance would wound your pride. You were afraid to admit you were wrong.
When you trade, that obsession to be right has a cost.
Here’s an example. Let’s say you set a price target on a stock. The stock doesn’t meet the target. In fact, it goes down.
But you hold on another day, telling yourself that you’re sure it will rally.
It doesn’t. So, you hold on one more day and twitter that you’re still right about this call. You even tell your friends how much you expect to make from this move.
It keeps going down.
Suddenly, you lost interest in the stock and search for other investments because if you keep this stock, you technically haven’t admitted you are wrong. You have a dog in your portfolio that cost you hundreds or even thousands of dollars because you didn’t want to say you screwed up.
How do I know this scenario so well? Because it accurately describes a trade I made on JDS Uniphase (JDSU) in the early 2000’s. Guess what? I still own the stock!
How is this program cured? The easiest way to cure this is by humor–believe it or not. Don’t be afraid to make fun of yourself. Don’t be afraid to admit that you’re not infallible. Then, take corrective action.
Admitting you’re not so smart, ironically, is the smartest thing to do.
Related posts:
- Are Humans Programmed To Lose Money?
- Are Humans Programmed To Lose: The Greed Factor
- Are Humans Programmed To Lose: Unbalanced Discipline
- Rich Dad-Wrong Dad: The Case For and Against 401 (k) Plans
- Learning The Wrong Lesson From A Bad Economy
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is one of my favorite financial books of all time. It's an allegory about a guy who has a terrible job, and how he overcomes challenges to achieve his dreams.
