In one classic experiment conducted by Daniel Kahneman and Amos Tversky, pioneers in the field of prospect 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”
Whenever a stock is bought it is the temptation and hope but not the fear. Many times the trade is made without much of analysis no matter what the stock did in the past it assumes a new life once an investor owns its, and he looks forward to a rosy future. But these simple expectations become complicated by what actually happens it is greed which raises new doubts, new concerns, and conflicts and we wait for more profits and this waiting turns a profitable trade in to losses. So a psychic dilemma with ego, id, and superego turn the situation in a state of constant battle.
Lesser profits are better than no profits or losses. Control greed and take rational decisions about exiting the stock. The execution is more important than reading or writing. Continue reading “Buying and selling in the Stock Market: When to sell and when to buy”