Loss Aversion and Irrational Focus

A passage from The Economist that may help our trading- The referee’s an anchor: A new book looks at the behavioral economics of sport

“Loss aversion”, the tendency for people to care more about avoiding a loss than about making a similar-sized gain, is rife even among the greatest champions. Evidence from a huge database of near-identical putts shows that, along with all the other golfers studied, Tiger Woods is more likely to hole a putt if it is to save par (in golf, an over-par hole feels like a failure) than if he had the identical putt to make a birdie (a gain). The authors argue that this is because he tries harder to avoid the loss than he does to make the gain. That makes no sense—the score versus par on an individual hole is not what matters in golf, but the number of strokes taken over the course of 18 holes. Each putt counts exactly the same, yet players treat them differently.

If you are down as a trader do you concentrate harder to get back to even but then coast when you are flat?  Or do you see each trade as One Good Trade and then One Good Trade and then One Good Trade because you never know when that huge chop is coming?

Mike Bellafiore

Author, One Good Trade

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