Don't fall into your own trap again

Author: Lin Yiming
Publisher:
Publish Date: 2006-04-01
Features: Everyone has irrational moments. You might think, "Investment experts can't make irrational decisions, right?" But in reality, that's not the case. The once-famous "Long-Term Capital Management" (LTCM) is a great example. Every partner in the company was a renowned figure, such as Nobel laureate Myron Scholes and Robert Merton, former Vice Chairman of the Federal Reserve Board David Mullins, and a world-famous economist. Yet, in the end, the investment failed, resulting in massive losses. People are still people, and they will always have emotional flaws. Investors are often influenced by psychological biases, leading to judgment errors and even becoming irrational, which prevents them from maximizing their benefits. Although investors may have sufficient knowledge, in real-world scenarios, they tend to rely too heavily on intuition, resulting in various behavioral mistakes.
Perhaps you've had such an experience: After careful analysis, you should have bought a stock, but in the real-world situation, you hesitated, afraid of buying at a high price or doubting whether your judgment was accurate. As a result, you watched opportunity after opportunity slip by. Or, in other situations, you might have become overconfident, clearly having chosen the wrong stock but refusing to admit your mistake and stop losses midway, leading to even greater losses.
You might think, "If I stay calm and make rational investments, I won't suffer losses!" But in reality, that's not always true—especially when most people become "irrational investors," the ones who are rational may end up failing in the end. For example, if a stock is rumored to have some false bad news, out of 100 investors, only one rational investor might see through the fake news and continue holding the stock. But if the other 99 investors believe the rumor and sell their shares, the stock price will fall irrationally, and the one who suffered the greatest loss will be the rational investor.
So, what makes investing interesting is that there are no fixed rules, because the rules change based on everyone's decisions. As long as most investors make choices that defy theory, the rational investors may end up failing in this irrational game. P6-7