Tuesday, 19 November 2013
Sunk Cost Fallacy (The Mind part of 3 Ms)
Of all the psychological mental blocks, this one is one of the hardest to undo even if we are fully aware of it.
Sunk cost fallacy
Have you ever been in a movie where after the first half-hour you realised the movie is crap. What do we do? We stay till the boring ending when it would make better sense to just walk-out of the cinema. No? We have already paid for the tickets right?
How about that not so cheap shirt or blouse that we bought but it does not quite fit us now because we've gained some weight? That shirt or blouse is in the cupboard gathering dust as we tell ourselves we can wear them again when we lose weight. Yeah right!
Then there is that girl or boy you have been dating for 7 years now. You realised deep inside he or she is not that right for you... But to admit the 7 years have been a mistake is too much of a emotional baggage to let go. So you got married anyway and go through the even more painful and hurting process of divorce years later...(You knew it all along; no surprises here. The only surprise is it took so long for your to finally "cut-loss"!)
There you go.
Now see if you can spot similarities between your day to day living and what you do with your investments or trading positions.
Knowing it is one thing. Willingness to change is another.
It's not easy.
And it's definitely not anyone and everyone can overcome this sunk cost fallacy mental block.
If you can, there's your edge over other investors/traders! Congrats!
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One good way to overcome:
ReplyDeleteBuy some when you have enough spare.
Sell some when you need to replenish spare.
In between just be happy to count dividends.
Trading around a dividend play position?
DeleteThat's provided we didn't overpaid in the first place ;)
Those who bought recent business trust IPOs need to collect 3-4 years of dividends just to break-even...
Well put
Deletecan cut loss means you have an edge in trading??
ReplyDeletecongrats?
let me enlighten you that cut loss is the easier thing to learn in trading, there are even more difficult one.
Deletecoconut,
DeleteI only used the word "cut-loss" on relationship in my post above ;)
The ability to overcome sunk cost fallacy is definitely an edge - especially when it comes to savings in time. Men has it easier. Can you imagine a girl wasting 7 years of her youth?
Of course cut-loss is easy for you! How many years have you been trading professionally? Do you think you can survive and profit till now if you do not have this "edge" over other traders? Show off!
don't like that le haha,
Deletecut loss is a pre-requsit in trading and many other things, that means is a must in order just to survive, not profit but just to stay alive.
so if you have just learn to cut losses quick, then you are just beginning to enter into the real world of professional trading, then comes the difficult part of learning more about yourself and the market.
in professional trading, its call risk management.
Deleteable to cut losses does not give us an edge in trading, we are not even at par, still a negative sum game. we will die of slow death.
Deleteso congrats what?
so believe me or not i can tell a person if he can trade or not just by looking in this daily activities, you are right, trading and living cannot be serperated.
DeleteAgree. It not easy after 7 years of "PAK TOA"
DeleteHow about after 20 years of marriage then divorce?
i have stocks since IPO>20 years. some i make money some i never make money. But still hold on to see what it can do to me lol (very small amount only). - "IRON TEETH" lol?
coconut,
DeleteHee hee.
Good. Now your tone nicer on the years ;)
Agree with you on risk management. It's to allow us to stay in the game long enough to learn and recover from our mistakes. Making money is still far far away...
temperament, are you a horder?
Deletetone nicer?
Deletebecos trading and living comes togather, i usually don't go into the market and say,
"excutes me, i think your price is so high, may i short you?", or "your price is just a little to high, not so high but a little you know, can i go short on you?"
oh come on!
coconut,
DeleteTalk to you my england suffers too. Opps! It's ears; not years. LOL!
I like it when you challenge and debate with me.
But don't patronise me with a "wah kali gong" tone,
Wink, wink.
LOL!
i think as a trader it also "hurts" my private life, only very few of my friend can understand and tolerate me just becos i tend to bring trading "principals" into what we do, i had hard time trying to accomodate them as they try to accomodate me.
Deleteaw....
DeleteCome, big hug time. Pat, pat.
I can tahan you. Just letting you know I got feelings too ;)
Eh, you can let go now...
Ahem.
"so believe me or not i can tell a person if he can trade or not just by looking in this daily activities, you are right, trading and living cannot be serperated."
ReplyDeleteUnquote:
Coconut, i agree with you. They say by looking at you how you read your news or newspapers will tell us where your interest is.
If the first few pages you read is about "Living & Culture" rather than "Financial & Economy", than most probably you are not so suitable for investing. No need to talk about "Temperament" then.
Cheers!
coconut,
ReplyDeletei suppose i am almost everything a person can experience in the stock markets
ya, especially those "gramas and mamas" they can't trade for sure.
Deletetemperament,
ReplyDeleteMoney lost can be earned back.
But time lost... That's the real cost of sunk cost fallacy!
Imagine study hard and work hard till in your 40s as a doctor. Then discover you all you really want is to be a writer. The brave (or silly) ones will make a mid-career change; the majority can't as there's too much sunk cost committed already...
Better late than never!
Silly me ;)
i add one point, in trading there is no sunk cost.
Deleteit does not matter what you did a minute ago or the last 20 years. it is about whats now, where and what are you standing onto.
oh and that includes those time spend holding their IPOs and their lost returns.
DeleteYes! You preserve and survive and able to fight another day is all about in the market until you call it a day.
Deleteso if one wants to be a trader, he or she better be prepared mentally, its very very differ from being a normal human being, sort of very unnatural feeling especially from the beginning. and many of those so call principles of being a good human, you can throw them into the dusbin.
DeleteAnd that's why 90% of all traders fail...
DeleteThe same goes for property and insurance salespersons.
Trading and hard-core selling are hunter professions where meritocracy rules - many try; few survive.
so if you are a optimistic kind of guy (like me), instead of feeling that you want to win (big), you should start with i don't want to be a loser and then you can forcus of losing losing losing or the prevention of it.
Deleteif you are a pessimisstic guy, you probably won't want to be in this line haha. but let say you do! then you should say i want to win and i can do it!
problem is, most of us are stuck in between, how?
ofcos you have to do both!
"The brave (or silly) ones will make a mid-career change; the majority can't as there's too much sunk cost committed already...Better late than never!"
ReplyDeleteUnquote:-
Yes i lose time value of money in holding on.
Better late then never is a wisdom not for nothing. i strongly believe in it.
So i may dumb KOH BROs one day.
i have KOH BROs since IPO. The company keeps on spinning/closing "new companies or subsidiaries that seem to benefit nobody but the KOH's family & associates.
But it works sometime. Like Rotary ENG. i still have 15 lots since IPO . Now it's in the money again.
Really silly me not you.
temperament,
DeleteI think we are being infected by coconut - "dump" - but he is so lovable isn't he? (This should make him puke!)
That reminds me of the "bad lesson" the CMZ saga may have given to newer investors. Our brains will focus on that 1 S-chip that recovered; but tunes out the other 20 odd S-chips that have gone to zero ;)
There is wisdom in this trading folklore:
A good trade is not necessarily a profitable one. (Took me years to finally accept and internalised it within my mindset)
Agree. You can learn from "The Good, The Bad & Ugly". In fact to me you can learn from anybody. Everyone of us has some value, you know.
ReplyDeleteso enough poking, i say this post is good reminder of our own weaknesses in life (haha), as i can see myself as well as others around me (sometime i just can't stand it honestly).
ReplyDeletebut to be a trader, you need much more than that to succeed.
Ah! Thanks!
DeleteNow I know why you have so strong views on this topic ;)
I am merely sharing the mistakes and reflections of my own journey - warts and all.
I do like the 3 Ms (Method, Money, Mind) way to encapsulate the holistic view of being a good trader. Most people stops at Method...
I'll share more on other psychological mental blocks in due time. They are either obstacles or an edge over others - depending on your temperament ;)
yes sir, psychological is key, trading is 90% mental and 10% strategy.
Deletenot just got the correct mental foundation but to push them to ones absolute limit if you want to succeed in trading.
so prepare for more stone throwing haha.
ofcos once to have a solid mental foundation (which we all lack of one way or another) and becomes a good trader, everything boils down to strategy strategy strategy.
Deleteby then your mental state and your strategy should comprement each other rather than fighting each other.
they wrote the song
ReplyDeletethey sing the song
but they didn't get number one.
they went broke!
other people copy and they got number one.
they got rich!
thats not fare!
http://www.youtube.com/watch?v=PyBS_1vGwpU
coconut,
DeleteI prefer Mariah Carey's cover ;)
The market will do what it wants to do by voting with their money.
the market is not always right!
Deletein fact market is always wrong, thats why they moves.
DeleteI never say market is always right. Only it will do what it wants to do ;)
DeleteMany great singers are not famous; while 2nd rate artiste are popular like hell. That's why we call them pop stars and pop songs...
hahaha, my daugter say she prefer the lady gaga version,...
Deleteif she sing it, haha.