Let your Profits run and cut your Losses short

In one classic experiment conducted by Daniel Kahneman and Amos Tversky, pioneers in the field of blogprospect theory, subjects were given a hypothetical choice between a sure $3,000 gain versus an 80% chance of a $4,000 gain and a 20% chance of not getting anything.

The vast majority of people preferred the sure $3,000 gain, even though the other alternative had a higher expected gain (0.80 × $4,000 = $3,200).

Then they flipped the question around and gave subjects a choice between a certain loss of $3,000 versus an 80% chance of losing $4,000 and a 20% chance of not losing anything. In this case, the vast majority chose to gamble and take the 80% chance of a $4,000 loss, even though the expected loss would be $3,200. Continue reading “Let your Profits run and cut your Losses short”

Thinking Fast and Slow to Beat the Market

Having trouble deciding whether you should worry more about the European banking crisis, the U.S. debt cliff or the slowdown in China? If so, you are not alone. But perhaps it is time to take a step back and consider how those worries are affecting your ability to think rationally.

The great expert on this question is the Nobel Prize winning psychologist, Daniel Kahneman. His best-selling book, Thinking, Fast and Slow, describes Mr. Kahneman’s intellectual journey in discovering how humans are hard-wired to make the wrong decisions much of the time.

Among the unhelpful mental biases that Mr. Kahneman discovered is our tendency to be overconfident about our ability to predict the future Continue reading “Thinking Fast and Slow to Beat the Market”