Happy People Make Terrible Traders

Thursday, May 24 2012 by
3
Happy People Make Terrible Traders

People who are happy are more confident and expect to make more money by trading, and anticipate taking lower risks in doing so. This result ought to be enough to depress most people, but most people are optimistic and don't depress easily. This is especially true if they make money on their random trades, because that makes them happier, more optimistic and more prone to trading. 

Even better, over-optimistic people are more socially popular and therefore more likely to be imitated. Whether any of this will really make anyone happier is doubtful, but we can but hope. It certainly won't make for better investors.

Egos at Large

The research that investors tend to be overconfident is pretty strong. We covered a summary of the evidence in Overconfidence and Over Optimism: investors overtrade and the amount they overtrade is related to their degree of overconfidence. And generally the more they trade the less money they make.

It's possible this is a problem of self-selection, where it's mainly over-optimistic people who over-trade. However, this isn't just a problem in investment. Humans seem, by and large, to be habitually overconfident on most positive traits and, according to this research by Williams and Gilovich, genuinely believe their flattering self-assessments. This, as the researchers suggest, seems to be related to the bias blind spot we looked at in Bamboozled by Your Bias Blind Spot.

Part of this seems to be caused by a basic problem of reference group neglect or egocentrism. People don't take into account the competition when they're asked to compete, but simply consider their own abilities at the task in hand. If the task is simple, they feel confident and ignore the fact that it's easy for everyone else as well. And vice versa when the task is hard. This is the hard-easy bias we touched on in Parsimonious, Big Picture Behavioral Bias.

Leaping Small Rhinos

So it may be that people are mistaking the fact that trading is easy – it's just a matter of pressing a few buttons – for the point that consistently making a decent return is hard. After all, stockmarket investing is a fiercely competitive environment – are you really better at it than the majority of other people out there?

All this leads to the awkward question of why…

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As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. The author may own shares in any companies discussed, all opinions are his/her own & are general/impersonal. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested.


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About timarr

Timarr

I'm a UK based technologist (career) and psychologist (academic) with a long-term interest in financial markets, with a particular emphasis (and skill) in how to not make money out of them. When I'm not working or blogging I'm to be found childminding, walking the dog or hiding in the garden shed with a good book :) more »


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