“Danah Boyd, a Social Media Researcher at Microsoft Research New England, spoke at SXSW on March 13, 2010, and reportedly talked about a teenage girl who often put risqué, sometimes illegal content online. When Boyd asked why she’d want to do something like that, the girl replied, “I want to get a modeling contract just like ….” Her calculation wasn’t about what she could potentially lose, but rather what she stood to gain.”
That whole “gain” vs “loss” approach immediately struck me as reflective of the very same naive/savvy approach that obtains when people trade stocks, bonds, commodities, options, and other stuff: What you see is that the relatively inexperienced traders, who tend to leave a lot of money in the markets, generally evaluate possible trades in terms of what they might gain. They say: “Geez, if I bet this $1,000, I could make $10,000. I’ll do it!”
Experienced traders, on the other who, who are the ones who tend to be the real winners in the markets and who generally come away with more money than they put in (and in a real sense take a good portion of the money that those less experienced traders lose) always evaluate potential trades in terms of what they might lose. In effect, they say: “Sure, I might make $10,000 on this trade, but I might lose $1,000. I’ll have to be careful.” As a general rule, they have to be dragged kicking and screaming into a trade by overwhelming and undeniable opportunity and favorable odds of success. Unless the situation looks really, really good to them, successful traders are content to keep their money on the sidelines and do nothing.
Put another way, inexperienced traders feel they need to be trading all the time, while savvy and successful traders feel they need to trade only when the situation looks exceptionally good. Warren Buffett, for example, is a value trader who seeks to buy solid assets for 50 cents on the dollar. He’s not a big risk taker. As a result, over the years he has gained 40 or 50 billion dollars just for himself, not even counting the vastly larger sums he has gained for others.
Apparently, this tendency of the newbies to look at possible gains and discount the risk, compared with the tendency of the “oldies” to look at possible losses and discount the opportunity, is a trait of the human species that plays out in several, if not many, contexts.
Where on this spectrum would you place yourself? Are you satisfied with your position?
For more on these important psychological aspects of trading and investing, please go here: