| Linda reveals truth about your thinking... | | | | But, here is the catch. Intuitive reactions and |
| In your own mind, answer this question about | | | | judgements - especially in shares - are generally a |
| Linda | | | | million to one shot at best. Even when backed by |
| Linda is 31 years old, single, outspoken, and very | | | | a small amount of evidence, the likelihood of |
| bright. She majored in philosophy. As a student, | | | | these reactions making money is practically zero. |
| she was deeply concerned with issues of | | | | The stock market is driven by fear, greed, hope, |
| discrimination and social justice, and also | | | | ego and most of all, by people. |
| participated in anti-nuclear demonstrations. | | | | Always remember that trading emotionally does |
| Which of these two options is more probable: | | | | not work and that is why you need to stay with |
| Linda is a bank teller, or | | | | your trading system, even though it will be your |
| Linda is a bank teller and active in the feminist | | | | natural human reaction to go with your gut feeling. |
| movement? | | | | Keep in mind that a trading system is a set of |
| Psychology theory tells us that 80%-90% of | | | | RULES that define your actions given any |
| most people will have answered (b). | | | | circumstance that might arise made of the 5 |
| Why (b) when there is no clear evidence that | | | | components. |
| Linda is going to be active in the feminist | | | | * Style - Definition of trading objective |
| movement? | | | | * Entry - Conditions required to open a trade |
| Why make such a significant personal judgement | | | | * Risk - Rules to limit losses; preserve funds |
| about a person we know practically nothing about | | | | * Exit - Rules to define exit points |
| after reading a single paragraph? | | | | * Testing - Proving your plan |
| This is because in an environment of uncertainty, | | | | Try this simple test: |
| we as humans tend to make intuitive, irrational | | | | Company A is a Perth-based mining company. In |
| judgements rather than rational decisions. | | | | May 2003, the company celebrated its 20th |
| These decisions will be at best biased, or too | | | | anniversary of listing on the Australian Stock |
| often wrong. | | | | Exchange ("ASX"). The company has two |
| This is even more serious when combined with | | | | operating divisions, Gold and Advanced Minerals. |
| the fact that humans suffer from cognitive | | | | Since its first gold pour in 1983, the Company has |
| dissonance, or the tendency to cling to one's | | | | produced over 4.7 million ounces of gold. Since |
| beliefs, even when presented with incontrovertible | | | | 1988m the Company's gold hedging programme |
| evidence to the contrary. | | | | has generated around A$706 million of additional |
| This means many people will continue to stick | | | | revenue by achieving an average realised delivery |
| with their emotional-based beliefs despite what | | | | price of A$651 per ounce of gold. This compares |
| they are taught or shown. | | | | with an average spot price over this period of |
| Part of this is due to the fact that amidst the | | | | A$497 per ounce. |
| chaos of social cues, humans must render | | | | Which of these two options is more probable: |
| judgments, generate inferences, make decisions | | | | You will buy company A, or... |
| and solve tangible problems in real time as events | | | | You will sell company A |
| happen. | | | | (page down for answer) |
| Evolution rewards intuitive reactions that have led | | | | Company A is Sons of Gwalia and collapsed in |
| to humans finding food, choosing a mate and, | | | | Sept 2004... |
| more recently, making a fortune on the stock | | | | Which option did you choose? |
| market. | | | | |