Skills which require overcoming human nature are particularly difficult. Trading in the stock market is one example…
With computerized traders that "hold" stocks for only a few seconds at a time and markets that can swing wildly in a matter of moments, long-term investing seems to be on the verge of extinction.
Perhaps this is inevitable. It turns out that short-term thinking is deeply embedded in the workings of the human brain. New research suggests that in order to avoid trading your accounts to death, you must counteract some of the very tendencies that make Homo sapiens the most intelligent of all species.
In a study published last month in the Journal of Neuroscience, researchers from California Institute of Technology, New York University and the University of Iowa looked at how people use past rewards to predict future payoffs.
Continue here: Why Your Brain is Killing Your Portfolio – WSJ.com.
For more on the topic, visit Brett Steenbarger, Ph.D.:
Do Individual Day Traders Make Money?
Excerpt: So what keeps new traders coming to an arena in which far fewer than 20% of participants are profitable after costs? Odean's research suggests that overconfidence plays an important role. Just as participants in lotteries and casinos overestimate their odds of winning, individual day traders may place too much confidence in their ability to read market patterns out of the gate. If that is true, the majority of individual day traders should fail relatively early in their careers, something that has been mentioned to me by executives at brokerage firms.
