[7:48 PM, 2/2/2020] Jiten Patel: Why Investors book profits earlier and let your losses run to infinity......
There are two aspects of this fallacy which are gifted to us by Evolutionary mechanism....
Disposition Effect.....The disposition effect is an anomaly discovered in behavioral finance. It relates to the tendency of investors to sell assets that have increased in value, while keeping assets that have dropped in value.....
Booking Profits.....one of the reasons we book profits is because of INSTANT GRATIFICATION..... we are constantly in a flux to decide between Reward and Punishment.....NOW OR NEVER..... Because in Savannah forest millions of years ago before we evolved into human beings..... when we were migrating from apes to human beings getting and gathering food was a big difficult task..... because we had no tools to even hunt and kill Animals to eat.....also in the food chain we were the last link.....even fruits on trees were a delicacy for our ancestors......
So whatever food we found was to consume immediately.....Now or Never..... because other animals were always around and we had the fear of being hunted and killed by wild animals.....so Instant Gratification in those days was the need of the hour for Survival.....the more you consumed food the better chance of survival and to pass your genes to the next generation..... Now this Evolutionary gifts of Now or Never and Instant Gratification in today's complex world get's us to become biased to many things which are of irrelevance.....
In those days the question was of Survival for food water shelter and sex.....but today all these things have become irrelevant in the modernise world where the above things are available in abundance.....
But because of Evolution all this biases and Heuristics and fallacies have been gifted to us through our genes and passed on to us by our ancestors.... and it will go on and on.....to next generations.....
Now why do we let our losses run to infinity.....
The pain of a lose is double that of the Gains....if we lose 50000 rupees the lose will be bigger and very disturbing than the gain of 100000.....losses are twice as powerful, psychologically, as gains..... this is because of Loss Aversion.....
Losses are Neurologically processed in the brain parts Insula ACC and Amygdala.....
Amygdala part of the brain is the most important which activates when you are faced with Danger....that is when your survival is in question..... now in today's complex world Losing Money also being processed in the above 3 parts of the Brain and the Process of taking a Monetary Loss activates this Limbic Survival parts of the Brain which is responsible to keep you out of Danger....So the Moment you take a decision to cut your losses this fear centric Amygdala part of the Brain starts firing and doesn't allow you to take the Decisions of cutting your losses because monetary loss is a dangerous thing for the Brain and for your well being and also there is a hope that recovery is on its way......So the brain confuses between the real Danger to life and Monetary Loss and treats them as one...... So it takes all the steps to stop you to book and cut your losses.....
Humans may be hardwired to be loss averse due to asymmetric evolutionary pressure on losses and gains: for an organism operating close to the edge of survival, the loss of a day's food could cause death, whereas the gain of an extra day's food would not cause an extra day of life (unless the food could be easily and effectively stored)
[9:19 PM, 2/2/2020] Jiten Patel: From planting a seed in the ground and GIVING Water doesn't mean the next day Full blown tree will grow....
Learn to ride a bike today doesn't mean next day you will start riding at 100km/hr....
Making a new friend today doesn't mean he will be a true friend and stick with you for the rest of your life
Learn to cook today doesn't mean you will be able to make pav bhaji tomorrow
Learning to write ABC doesn't mean next day you will start writing Sentences......
Learning to take your first step doesn't mean the next day you will start running.....
Learning to play cricket doesn't mean you will start playing for indian team.....
Than without learning what F&O trading and Speculation is why the very next day you want to Start Trading in F&O.......
Than without learning why do you want to invest your hard earned money in stock market.....
So everything in life needs learning and waiting for things to develop......to grow.......
There are two aspects of this fallacy which are gifted to us by Evolutionary mechanism....
Disposition Effect.....The disposition effect is an anomaly discovered in behavioral finance. It relates to the tendency of investors to sell assets that have increased in value, while keeping assets that have dropped in value.....
Booking Profits.....one of the reasons we book profits is because of INSTANT GRATIFICATION..... we are constantly in a flux to decide between Reward and Punishment.....NOW OR NEVER..... Because in Savannah forest millions of years ago before we evolved into human beings..... when we were migrating from apes to human beings getting and gathering food was a big difficult task..... because we had no tools to even hunt and kill Animals to eat.....also in the food chain we were the last link.....even fruits on trees were a delicacy for our ancestors......
So whatever food we found was to consume immediately.....Now or Never..... because other animals were always around and we had the fear of being hunted and killed by wild animals.....so Instant Gratification in those days was the need of the hour for Survival.....the more you consumed food the better chance of survival and to pass your genes to the next generation..... Now this Evolutionary gifts of Now or Never and Instant Gratification in today's complex world get's us to become biased to many things which are of irrelevance.....
In those days the question was of Survival for food water shelter and sex.....but today all these things have become irrelevant in the modernise world where the above things are available in abundance.....
But because of Evolution all this biases and Heuristics and fallacies have been gifted to us through our genes and passed on to us by our ancestors.... and it will go on and on.....to next generations.....
Now why do we let our losses run to infinity.....
The pain of a lose is double that of the Gains....if we lose 50000 rupees the lose will be bigger and very disturbing than the gain of 100000.....losses are twice as powerful, psychologically, as gains..... this is because of Loss Aversion.....
Losses are Neurologically processed in the brain parts Insula ACC and Amygdala.....
Amygdala part of the brain is the most important which activates when you are faced with Danger....that is when your survival is in question..... now in today's complex world Losing Money also being processed in the above 3 parts of the Brain and the Process of taking a Monetary Loss activates this Limbic Survival parts of the Brain which is responsible to keep you out of Danger....So the Moment you take a decision to cut your losses this fear centric Amygdala part of the Brain starts firing and doesn't allow you to take the Decisions of cutting your losses because monetary loss is a dangerous thing for the Brain and for your well being and also there is a hope that recovery is on its way......So the brain confuses between the real Danger to life and Monetary Loss and treats them as one...... So it takes all the steps to stop you to book and cut your losses.....
Humans may be hardwired to be loss averse due to asymmetric evolutionary pressure on losses and gains: for an organism operating close to the edge of survival, the loss of a day's food could cause death, whereas the gain of an extra day's food would not cause an extra day of life (unless the food could be easily and effectively stored)
[9:19 PM, 2/2/2020] Jiten Patel: From planting a seed in the ground and GIVING Water doesn't mean the next day Full blown tree will grow....
Learn to ride a bike today doesn't mean next day you will start riding at 100km/hr....
Making a new friend today doesn't mean he will be a true friend and stick with you for the rest of your life
Learn to cook today doesn't mean you will be able to make pav bhaji tomorrow
Learning to write ABC doesn't mean next day you will start writing Sentences......
Learning to take your first step doesn't mean the next day you will start running.....
Learning to play cricket doesn't mean you will start playing for indian team.....
Than without learning what F&O trading and Speculation is why the very next day you want to Start Trading in F&O.......
Than without learning why do you want to invest your hard earned money in stock market.....
So everything in life needs learning and waiting for things to develop......to grow.......
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