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Following The Stock Market Is Bad For Your Returns

This is a good piece – one those ones I wish I had written.

Summary:  The irony of equity investing is this: if you knew nothing about the stock market and did not follow any financial news, you have probably made a very handsome return on your investment, but if you tried to be a little bit smarter and read any commentary from experienced managers, you probably performed poorly.

The human mind has a tendency to assess risk based on prominent events that are easily remembered. The 1987 crash, the tech bubble, the financial crisis and the flash crash in 2010 are all events that are easily recalled. The mind automatically assigns a high probability to prominent (but rare) events. It ignores the more important “base rate” probability that better informs decisions. The fact that the stock market rises in 76% of all years, that it gains an average of 7.5% per year and that annual falls greater than 20% occur less than 5% of the time, are ignored in decision making. The mind interprets every 10% correction as the beginning of something much worse, even though a 10% fall is a typical, annual occurrence during bull markets.

Bearish market commentary that highlight risk conjure gravitas. Bullish commentary often seems shallow. But remember, in the absence of relevant data, the “base rate” probability is your best guide. Conflating prominent, but rare, events with high probability is an ongoing impediment to better investment returns. Recognizing this inherent deficiency in our decision making is perhaps the biggest potential source for improvement for most investors.

More here – The Fat Pitch

Phil Pearlman, Stock Market Psychologist


 

How to Recharge Before You Lose All Your Money

Take a mental health day whenever you feel you need it.

No one is going to be there to give you permission to do so. Trading is a grind and a marathon.

Doing the same thing day in and day out can become monotonous. You’re not loser nor are you losing focus by taking care of yourself.

If you’re taking 3-day weekends ever few months/weeks, you might not feel the burn that others feel.

I think it’s very healthy to put some distance between yourself and the market for no particular reason.

You don’t have to be in a massive drawdown to do this. Shake it up a bit and get back to center.

As you might have heard me say, “there are no external solutions to your internal problems,” changing your routine can be refreshing when you’re in a lull.

More here – Martin Kronicle

 

PS: Having just returned from almost three weeks of only casually looking at markets I can attest to the benefits of this. The market will always be there when you get back.

Stress hormones in financial traders may trigger ‘risk aversion,’ contribute to market crises

High levels of the stress hormone cortisol may contribute to the risk aversion and ‘irrational pessimism’ found among bankers and fund managers during financial crises, according to a new study. Cortisol is a hormone secreted by the adrenal glands in response to moments of high physical stress, such as ‘fight or flight’. Importantly, cortisol also rises powerfully in situations of uncertainty, such as volatility in the financial markets. Cortisol prepares us for possible action by releasing glucose and free fatty acids into the blood. It also suppresses any bodily functions not needed during a crisis — such as the digestive, reproductive, and immune systems.

More here – Science Daily

8 Subconscious Mistakes Our Brains Make Every Day–And How To Avoid Them

Get ready to have your mind blown.

I was seriously shocked at some of these mistakes in thinking that I subconsciously make all the time. Obviously, none of them are huge, life-threatening mistakes, but they are really surprising and avoiding them could help us make more rational, sensible decisions.
Especially since we strive for self-improvement at Buffer, if we look at our values, being aware of the mistakes we naturally have in our thinking can make a big difference in avoiding them. Unfortunately, most of these occur subconsciously, so it will also take time and effort to avoid them–if you want to.

Regardless, I think it’s fascinating to learn more about how we think and make decisions every day, so let’s take a look at some of these habits of thinking that we didn’t know we had.

More here – FastCompany

Gamblers, Scientists and the Mysterious Hot Hand

IN the opening act of Tom Stoppard’s play “Rosencrantz and Guildenstern Are Dead,” the two characters are passing the time by betting on the outcome of a coin toss. Guildenstern retrieves a gold piece from his bag and flips it in the air. “Heads,” Rosencrantz announces as he adds the coin to his growing collection.

Guil, as he’s called for short, flips another coin. Heads. And another. Heads again. Seventy-seven heads later, as his satchel becomes emptier and emptier, he wonders: Has there been a breakdown in the laws of probability? Are supernatural forces intervening? Have he and his friend become stuck in time, reliving the same random coin flip again and again?

Eighty-five heads, 89… Surely his losing streak is about to end.

Psychologists who study how the human mind responds to randomness call this the gambler’s fallacy — the belief that on some cosmic plane a run of bad luck creates an imbalance that must ultimately be corrected, a pressure that must be relieved. After several bad rolls, surely the dice are primed to land in a more advantageous way.

The opposite of that is the hot-hand fallacy — the belief that winning streaks, whether in basketball or coin tossing, have a tendency to continue, as if propelled by their own momentum. Both misconceptions are reflections of the brain’s wired-in rejection of the power that randomness holds over our lives. Look deep enough, we instinctively believe, and we may uncover a hidden order.

More here – The New York Times

How Loving-kindness Meditation Makes You Healthier, Happier, and Kinder

If you’ve ever watched someone meditating it looks like they’re just sitting there with their eyes closed. But what’s going on in their head is extremely interesting: metta meditation (or ‘loving-kindness’ meditation if that’s your thing) has been proven to actually make long-term practitioners certifiably better people. You might have to do it for 1,000 hours to see discernible effects in your brainwaves, but it’s still fascinating news for those in the mediation field and indeed anyone interested in brain science.

More here including video – Big Think

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