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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4 Comments on “Loss Aversion and Irrational Focus”

  1. Of course, I am for the 2nd choice with One Good Trade. But O-G-T doesen’t necessarily mean a winning trade – but a correct one. So my question is: how long can you resist in trying to make O-G-T while that huge chop isn’t coming? And if it takes you too long is that a sign that you need to readapt to a new market?
    For example: one might be a trend follower but the market gaps up and trades within a range. For that person approaching the trades with trend following ‘check in’ might be a One Good Trade. But as the market is it in range, a correct approach would be to buy the S and sell the R.

  2. I suffer a bit from this, but then again I trade my own money, not a prop desk, a little more pressure to be loss adverse. That said, if down near my limit, I jot down a few stocks that should move in the last 1-2 hours and walk away for a few hours. That gets me to focus on OGT. Today was down just a little on open, seemed no big deal, looked for that one good trade, and GS came through with a very nice ralley.

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