Let It Go
Have you ever owned an older car and sunk a lot of money into it? First the transmission goes out, and you figure that rather than buying a new car, you would save money if you repaired it, but then it needs a valve job. It doesn't end there. You replace some of the wiring and then it hits you: You would have been better off buying a new car, but at this point, you've sunk so much money into your car, you can't seem to part with it. This same phenomenon happens while trading, We may put a great deal of time and effort into a trading strategy or method and we just cannot seem to give it up no matter how much we have lost. Behavioral economists call this malady the sunk cost effect.
The sunk cost effect is most insidious while holding on to a losing trade. Suppose you were holding a position that had lost 20% of its value for the last four months. Your trading plan may dictate that you close the trade, but you do not close it. Instead, you can't believe how wrong things are going. You think of how much time and effort you put in studying the fundamentals of the company, and watching the markets to find the right time to enter. You hold on and things get worse. At some point, your thinking is fatalistic and you figure, "Why stop now? What else do I have to lose?"
It's easy to fall for the sunk cost effect. Humans hate to experience a loss or setback of any kind, and when they do, they increase their commitment to a losing course of action because a great deal of time, effort, and/or money has been spent. But when this happens, it is better to just accept the setback, cut your losses and move on.
It's hard to admit we were wrong, though. It's like the old car you dump money into. You feel like you have to justify the time and effort you put into a losing course of action, and rather than admit you are wrong, you just put in even more time, effort and money. In the end, however, it is vital to admit you've made a mistake and move on before the situation compounds into an even bigger problem.
One of the best ways to beat the sunk cost effect is to allow yourself to make mistakes. The sunk cost effect is especially powerful when we believe that we must be perfect. But we don't need to be perfect. We can be human. This is where a strong independence streak is useful. Independent people don't care what anyone else thinks. When we feel we must justify our actions, we usually are not trying to justify our decisions for ourselves. Usually, we are trying to justify our actions to someone else. It may be friends, family, or even some undefined social standards we feel we absolutely must obey. But in the end, the only standards that you must meet are your own. So if you want to be a fallible human being, you have the right. Once we realize that we do not have to justify our mistakes, it's easier to accept a setback and move on.
Don't waste time justifying your mistakes. Trying to justify your behavior will gnaw at you, and if you are not aware of it, and are not trying to control it, you will have a tendency to get stuck and stagnate. As you trade, be aware of the powerful influence of the sunk cost effect. Try to consider whether or not sunk costs are influencing your decisions. Don't try to justify a losing course of action. Let it go and move on to the many trading opportunities that are waiting for you out there.
The sunk cost effect is most insidious while holding on to a losing trade. Suppose you were holding a position that had lost 20% of its value for the last four months. Your trading plan may dictate that you close the trade, but you do not close it. Instead, you can't believe how wrong things are going. You think of how much time and effort you put in studying the fundamentals of the company, and watching the markets to find the right time to enter. You hold on and things get worse. At some point, your thinking is fatalistic and you figure, "Why stop now? What else do I have to lose?"
It's easy to fall for the sunk cost effect. Humans hate to experience a loss or setback of any kind, and when they do, they increase their commitment to a losing course of action because a great deal of time, effort, and/or money has been spent. But when this happens, it is better to just accept the setback, cut your losses and move on.
It's hard to admit we were wrong, though. It's like the old car you dump money into. You feel like you have to justify the time and effort you put into a losing course of action, and rather than admit you are wrong, you just put in even more time, effort and money. In the end, however, it is vital to admit you've made a mistake and move on before the situation compounds into an even bigger problem.
One of the best ways to beat the sunk cost effect is to allow yourself to make mistakes. The sunk cost effect is especially powerful when we believe that we must be perfect. But we don't need to be perfect. We can be human. This is where a strong independence streak is useful. Independent people don't care what anyone else thinks. When we feel we must justify our actions, we usually are not trying to justify our decisions for ourselves. Usually, we are trying to justify our actions to someone else. It may be friends, family, or even some undefined social standards we feel we absolutely must obey. But in the end, the only standards that you must meet are your own. So if you want to be a fallible human being, you have the right. Once we realize that we do not have to justify our mistakes, it's easier to accept a setback and move on.
Don't waste time justifying your mistakes. Trying to justify your behavior will gnaw at you, and if you are not aware of it, and are not trying to control it, you will have a tendency to get stuck and stagnate. As you trade, be aware of the powerful influence of the sunk cost effect. Try to consider whether or not sunk costs are influencing your decisions. Don't try to justify a losing course of action. Let it go and move on to the many trading opportunities that are waiting for you out there.
posted by nomadhunter at 7:31 PM
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