Page 470 - THE MARKET WHISPERER

466 PART 14 - The Demons Are Coming!

usually identify such states in retrospect, and usually when it is already
too late.

A familiar problem is our psychological state after absorbing a loss.
Every trader, even the most successful, experiences periods of losses. They
affect us mentally and emotionally, and impact our decisions. They are the
first and foremost reason for additional financial damage. Get to know the
scope of impact that loss has on you and how to best cope with it.

Don’t We Just Hate to Lose!
Research proves that the effect of loss is double that of the effect of

profit (Kahneman & Tversky, 1991). One of my favorite examples from
Kahneman’s book is the coin gamble. In conferences where I lecture, I
often conduct that experiment: I flip a coin and ask a volunteer if he or she
is willing to participate in the gamble. If the volunteer guesses the answer
correctly, I will pay $120, but if the volunteer gets it wrong, then he or she
will have to pay me only $100. Despite the clear profit in the gain, 95% of
lecture attendees refuse to take on the risk. Why? Because losing $100 is
far more loathsome to us than gaining $120. Research has further proven
that only if I up the ante to $200 for a correct guess compared to $100
paid to me if the volunteer guesses wrong, a 2:1 ratio, the majority of the
audience will be willing to take the chance.

Losing Hurts
The human body is built to resist pain. It is therefore natural that we

deny loss and hope for the best. When hoping for good is illogical, it is
reasonable to presume that we will experience further damage. If you
check the investment portfolio of the average investor, you will almost
always find at least one stock showing a loss of 50% or more.

In my view, there is no logical reason to let any stock cause a loss of this
scope. Denying loss at the outset and moving to inexplicable, somewhat
euphoric optimism are the reasons for losses of this scope.

Another interesting phenomenon is that the stocks that have lost
the most are those that the investor ceases following. The psychological
handling of loss by most inexperienced traders is to ignore that stock. This
is when self-justification steps in, and the investor spouts such phrases
as, “it will make a comeback,” or “the company has good products,” “the
organization’s management is strong,” or “it’s no more than a paper loss.”
How about: “the prices always go up in the long run” or even pleading with
the price itself: “please, just go up 10% and I swear I’ll stop smoking!”