Why do people lose money in the stock market?
The reason why people lose money in the stock market is that we are genetically programmed to survive in the real jungle. The instincts which preserves our lives in the real jungle are disastrous in the financial jungle.
For example, we instinctly find security in numbers. In primitive times we organised ourselves in small groups that work together for survival. But in the financial jungle this is disastrous. When everybody is buying stocks we should be selling. But that is very hard to do because it goes against our instincts. When everybody is selling, we should be buying. But that too is hard to do. We feel safety in a large group - precisely the same instinct when we were in the real jungle.
We also are programmed to avoid pain and seek pleasure. Pain and pleasure are things that we learn when we are very young. Thus we are quick to take profits and slow to cut losses. It is a great joy when we take profit and we feel pain when we take our losses. When we take profits, we think of the things that we can buy with the money - that car, expensive holidays or a g reat meal. When we cut our losses, we know we know that we have abandoned hope in using the money to buy those things that will bring us pleasure.
This is wrong from an investment point of view. The correct approach is to let our winners run and dispose of our mistakes before they do more damage.
Thus human nature makes us lose money in the stock market.
For example, we instinctly find security in numbers. In primitive times we organised ourselves in small groups that work together for survival. But in the financial jungle this is disastrous. When everybody is buying stocks we should be selling. But that is very hard to do because it goes against our instincts. When everybody is selling, we should be buying. But that too is hard to do. We feel safety in a large group - precisely the same instinct when we were in the real jungle.
We also are programmed to avoid pain and seek pleasure. Pain and pleasure are things that we learn when we are very young. Thus we are quick to take profits and slow to cut losses. It is a great joy when we take profit and we feel pain when we take our losses. When we take profits, we think of the things that we can buy with the money - that car, expensive holidays or a g reat meal. When we cut our losses, we know we know that we have abandoned hope in using the money to buy those things that will bring us pleasure.
This is wrong from an investment point of view. The correct approach is to let our winners run and dispose of our mistakes before they do more damage.
Thus human nature makes us lose money in the stock market.
posted by Ohmyrus at
6:58 PM
0 Comments:
Post a Comment
<< Home