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Dead Sure Or Just Plain Dead

InvestorEducation / Learn to Trade Oct 20, 2009 - 10:25 AM GMT

By: Charles_Maley

InvestorEducation

Before you attempt to beat the odds, be sure you could survive the odds beating you -LARRY KERSTEN, AMERICAN SOCIOLOGIST


It’s amazing to me how confident we humans can be about certain things. For example, if you ask someone if they are a good driver, they will most definitely say yes. In fact, a poll I read not that long ago said that 82% of drivers perceive themselves in the top 30% of all drivers. How in the world would a person know such a thing? A similar poll in the academic world found that when students were polled, 80% said they would finish in the top half of their class. Now, even I know that’s mathematically impossible.

Michael Pompian, in his book Behavioral Finance and Wealth Management said, “The concept of overconfidence derives from a large body of cognitive psychological experiments and surveys in which subjects over estimate both their own predictive abilities and the precision of the information they’ve been given. People are poorly calibrated in estimating probabilities- events they think are certain to happen are often far less than 100% certain to occur. In short, people think they are smarter and have better information than they actual do.”

On CNBC for example, you will see a parade of experts that will tell you precisely where a market is going, or even more delusional, how the entire economy will unfold. The amazing part is they deliver their forecast with utmost confidence even though they have been mostly wrong in the past. They also seem to attribute any success to skill, never considering that luck may have played a role. What’s that old saying? Don’t ever confuse brains with a bull market.

Although confidence is a good thing, being over confident can lead to arrogance and inflexibility when trading. Pompian goes on to say, “As people find out more about a situation, the accuracy of their judgments is not likely to increase, but their confidence does increase, as they fallaciously equate the quantity of information with its quality.” This can cause us to put the blinders on when we see negative information. It can also cause us to have a larger position than we should or over weighted to one position. Most important, it seems the more we overestimate what we think we know, we simultaneously underestimate what we don’t know ……the downside risk.  

So I guess the moral of the story is being dead sure can sometimes lead to being just dead.

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Charles Maley
www.viewpointsofacommoditytrader.com
Charles has been in the financial arena since 1980. Charles is a Partner of Angus Jackson Partners, Inc. where he is currently building a track record trading the concepts that has taken thirty years to learn. He uses multiple trading systems to trade over 65 markets with multiple risk management strategies. More importantly he manages the programs in the “Real World”, adjusting for the surprises of inevitable change and random events. Charles keeps a Blog on the concepts, observations, and intuitions that can help all traders become better traders.


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