13 Lessons Learnt on Human Nature and the Financial Markets

August 26, 2014

in Making Money

By Alvin Chow (guest contributor)

After many years of trading and investing, I’ve come to certain realizations about human nature and the financial markets. I’d like to share them with you in this article, so that you may save yourself some expensive lessons.

1. Predictions are hardly accurate as tomorrow is uncertain. We only boast about things we have predicted accurately, but say nothing about the other half we got wrong.

2. Skills can bring us moderate success. However, luck is needed for greater  success (credit to Jon).

3. We tend to credit our successes to good skill and blame our failures on poor luck.

4. Some of us rely on luck (most unknowingly) by investing for high returns (and losses). A few of us will make big money but most of us will end up much poorer.

5. Some of us deliberately limit the luck factor by investing based on  capital guarantee and guaranteed returns. None of us who do this will make big money but none of us will be significantly poorer.

6. We need to know how much we can afford to lose (financially and emotionally) before deciding to be No. 4 or No. 5, or somewhere in between.

7. We have many biases. The degree of success in investing or trading depends on how much we can keep our biases in check. No, we cannot remove our biases totally.

8. Confirmation bias – we see what we want to see. We seek evidence to validate our investment decision and ignore those that suggest otherwise.

9. Availability bias – we are influenced by  things we observe. If people around us  made money through property investment, we tend to think  properties are the best investments in the world and develop a preference for them.

10. Loss aversion bias – we want to be compensated with high returns before we decide to take the risk to invest. We often wait for markets move and reflect high returns before we want to invest. We are not interested if markets are not moving.

11. Hindsight bias – we tend to say “I knew it” after an event has happened.

12. “Survivor-ship” bias – we only  hear stories of successes but many stories of failures have been untold.  See No 2 and No 3.

13. Most of us do not know what we want in life. We think we will be happier with more money – but this is true only to a certain extent.


By guest contributor Alvin Chow, who blogs at Big Fat Purse, a Singapore personal finance blog.

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