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2024/09
Conquering Personal Bias: The Crucial Factor for Success in Trading"
If you cannot overcome personal biases, success in trading will remain elusive. Have you heard of the Skinner pigeon experiment? Behavioral psychologist B.F. Skinner conducted an experiment where he placed eight pigeons in a cage and fed them.
To increase their motivation to find food, Skinner kept the pigeons hungry for several days before the test. The pigeons received food from a dispenser set to deliver food every five minutes, regardless of their actions. In other words, the pigeons received a reward every five minutes regardless of what they did. However, the results were surprising. Six of the pigeons displayed noticeable behaviors: one continually walked in circles, another repeatedly pecked at a corner of the cage, a third did something peculiar by putting its head under an invisible rod and then repeatedly lifting it.
Two others displayed head and body swaying movements, while one formed incomplete or unclear conditioned responses.
In the unpredictable and challenging world of trading, personal biases often act as invisible traps leading to failure. Many investors enter this field with enthusiasm and expectations but end up missing success due to their inability to overcome internal biases.
Personal biases in trading manifest in various ways. For example, excessive favoritism towards a particular industry or company, driven merely by personal preference or past experiences, can lead to ignoring objective market data and analysis. This emotional bias may result in irrational investment decisions, blindly investing large amounts of money while overlooking potential risks.
Alternatively, we might be influenced by the “herd mentality,” where we follow the crowd into a particular investment without thorough research or independent judgment. This behavior of following the masses is, in essence, another form of bias, leading us to abandon our own thinking and be swayed by the emotions of the group .
Another example is the resistance to new investment ideas or strategies due to preconceived notions, thinking they are too complex or unreliable, thereby rejecting the opportunity to try and learn. This bias against new things may cause us to miss valuable opportunities and fail to keep up with market changes and developments.
In “The Intelligent Investor,” Benjamin Graham mentions common investment psychological and cognitive biases, including but not limited to:
- Overconfidence: Investors often have excessive confidence in their abilities and judgments, leading to decisions made without thorough research and analysis.
- Herd Effect: Blindly following the investment behavior of the crowd rather than relying on independent thought and analysis.
- Short-Termism: Focusing too much on short-term market fluctuations and returns while neglecting long-term investment value.
- Loss Aversion: The pain of losses is felt much more acutely than the pleasure of gains, which may lead investors to sell profitable investments prematurely while holding on to losing investments.
- Anchoring Effect: Relying too heavily on past prices or information for decision-making rather than adapting to current market conditions.
So, how can we overcome these personal biases?
First, cultivate critical thinking. For every investment opportunity, ask yourself: Why am I making this decision? Is it based on objective facts and data, or just personal feelings and preferences? Learn to question your thoughts and analyze and evaluate from different perspectives to make more informed choices.
Second, maintain an open mind. Do not easily dismiss new investment ideas and strategies; be willing to try and learn. The market is constantly changing, and only by continuously updating your knowledge and skills can you adapt to its demands.
Additionally, establishing a comprehensive investment system is crucial. Define your investment goals, risk tolerance, and strategies clearly, and adhere to these rules strictly. This can help avoid impulsive decisions driven by emotions and biases.
As the saying goes, we view the world through tinted glasses, seeing but not clearly, hearing but not understanding. Speculation is part of life, and biases formed in life also play a significant role in our market views. When a person fails, they become more cautious and objective, reducing some of their subjective biases. However, when a person succeeds, they often become more stubborn, which is why many speculators, even after making millions, eventually end up bankrupt. If we cannot discard subjective biases and view the market with an open and objective mindset, ignoring the information the market tries to convey, and instead stubbornly believe that the market will evolve according to our will, we will always fall into the next mistake.
As the Diamond Sutra says, “All phenomena are like dreams, illusions, bubbles, and shadows; like dew and lightning, one should observe them thus.”
In summary, overcoming personal biases is a crucial step towards success in trading. Only by approaching the market with objectivity, rationality, and openness can we navigate the ever-changing investment environment steadily and achieve our wealth growth goals.
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