A Windfall Is Not the House's Money
Trading profits usually don't come in a steady stream. Sometimes you run hot and sometimes you run cold. If you ask seasoned professionals about their profits, they will often tell you that a few big wins made their year. The way you view your wins dictates how you approach them. If you expect your wins to come in a steady stream, you may tend to view a big, unexpected win as a windfall. And when people view money as a windfall, they tend to view it as fun money, money that can be spent on a whim. It's like winning big at a casino. When you don't expect to win, you figure that you can take risky gambles. After all, it's the house's money, isn't it? On the contrary, however you make wins, hard-won or unexpected, you should view profits as significant investment capital that should be managed prudently.
A series of studies by Dr. Hal Arkes and colleagues at Ohio University illustrates how people tend to spend windfalls more freely. In one study, participants considered money that was won unexpectedly in a radio contest versus money that was earned by working overtime on weekends. When money was won unexpectedly, it was spent more freely. In a second study, participants were randomly assigned to expect a payment or were unexpectedly given a windfall. They were given a $5 payment right before attending a basketball game and their spending was monitored at the game. People who expected the $5 spent 38 cents on average while people who received an unexpected windfall spent 90 cents on average. In a similar experiment, participants were given $3 in quarters and asked to place a bet on a roll of dice. Participants who anticipated the payment bet $1 on average while participants who received an unexpected windfall bet $2 on average.
These studies show that when people receive windfalls they are willing to spend them more freely. It's as if they take the attitude, "easy come, easy go." This approach to money can also be applied to trading profits. Some profits tend to come easier than others. Sometimes one must patiently wait for the right market opportunity to present itself, and patiently wait to sell at the right time. Such profits take time and effort to accumulate. In other cases, profits may be easier to come by. For example, a media analyst may unexpectedly talk up a stock and the price may rise unexpectedly, or a product announcement may lead to increased buying by the masses, resulting in an unexpected profit. These unexpected windfalls may be treated as easy money and risked more freely. But profits are profits. It is vital to treat profits equally, regardless of how easy they were accumulated. When trading the markets, how well you do across a series of trades is tantamount. You may not profit consistently, but sporadically. It's essential that you carefully manage your capital. Don't feel that you can take bigger risks with capital that was easy to come by. Capital is capital, and if you manage it prudently, you will survive minor changes in market conditions and increase your overall profits.
A series of studies by Dr. Hal Arkes and colleagues at Ohio University illustrates how people tend to spend windfalls more freely. In one study, participants considered money that was won unexpectedly in a radio contest versus money that was earned by working overtime on weekends. When money was won unexpectedly, it was spent more freely. In a second study, participants were randomly assigned to expect a payment or were unexpectedly given a windfall. They were given a $5 payment right before attending a basketball game and their spending was monitored at the game. People who expected the $5 spent 38 cents on average while people who received an unexpected windfall spent 90 cents on average. In a similar experiment, participants were given $3 in quarters and asked to place a bet on a roll of dice. Participants who anticipated the payment bet $1 on average while participants who received an unexpected windfall bet $2 on average.
These studies show that when people receive windfalls they are willing to spend them more freely. It's as if they take the attitude, "easy come, easy go." This approach to money can also be applied to trading profits. Some profits tend to come easier than others. Sometimes one must patiently wait for the right market opportunity to present itself, and patiently wait to sell at the right time. Such profits take time and effort to accumulate. In other cases, profits may be easier to come by. For example, a media analyst may unexpectedly talk up a stock and the price may rise unexpectedly, or a product announcement may lead to increased buying by the masses, resulting in an unexpected profit. These unexpected windfalls may be treated as easy money and risked more freely. But profits are profits. It is vital to treat profits equally, regardless of how easy they were accumulated. When trading the markets, how well you do across a series of trades is tantamount. You may not profit consistently, but sporadically. It's essential that you carefully manage your capital. Don't feel that you can take bigger risks with capital that was easy to come by. Capital is capital, and if you manage it prudently, you will survive minor changes in market conditions and increase your overall profits.
posted by nomadhunter at 5:34 PM
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