How to control yourself in investing? Avoid falling into the “overtrading” trap

There is ample evidence that people are distracted from making decisions by seemingly insignificant and completely irrelevant factors. Nobel Laureate Kahneman calls them: noise.

How to control yourself in investing? Avoid falling into the "overtrading" trap

According to an article in the Financial Times, there is overwhelming evidence that people are disturbed in their decision making by seemingly insignificant and completely irrelevant factors. Nobel laureate Kahneman calls them: noise.

The author of the article, George Ng (CEO of Wufoo Capital, Singapore), points out that in the real world, as long as people are making decisions, they will be influenced by “noise”. People who need to make decisions in the field of financial investment are no exception.

In his article, he cites a statistical study of 200 financial advisors (Davies, 2021), which showed that they made very different risk assessments for the same investor client. At the same time, their recommended equity allocations for the same client included various figures ranging from 0% to 100%.

Based on this study, George Ng concluded that in addition to financial advisors, we investors ourselves, in our daily investment activities, often make a variety of contradictory and irrational decisions that end up dragging down our investment returns.

Statmen’s statistical results in 2010 showed that retail investors in the U.S. stock market, the higher the frequency of transactions, the worse the investment returns. Those retail investors who buy and sell the most frequently have investment returns that are about 7% worse than the index returns for the same period each year.

The study showed that the more individual decisions made, the more susceptible they are to noise and therefore the more likely they are to make mistakes, leading to worse returns for themselves.

In his article, George Ng asks: Why is it so easy for individual investors to fall into the trap of “overtrading”? The following reasons are summarized.

First, investors are susceptible to the “illusion of control”. If you buy an index fund or stock and then hold it for a long time without doing anything, it is easy to create the illusion that your investment is not under your control. But the future of the market is not clear, no one knows whether the market will go up or down next.

Second, most investors find it hard to accept the word “mediocre”. Few investors are willing to admit that their investment ability is below average, so they prove their excellence by choosing stocks, funds or timing.

Again, investors tend to underestimate the luck component of investing. Short-term investment results often carry a large element of randomness. If an individual investor thinks he is good at investing, he will have a habit of using the scattered evidence to further reinforce his beliefs while ignoring the evidence that works against him. Over time, even if the investor’s real performance is poor, he may have the illusion of being a “folk Warren Buffett” and indulge in overtrading, according to Ng.

At the end of the article, George Ng concludes that whether you are an expert or a layman, you may be influenced by external noise and irrational behavior habits when making various decisions, leading us to make inconsistent decisions. Very often, the biggest enemy in investment is precisely ourselves. Investing is a marathon, not a 100-meter run. The final victory must belong to those long-term investors with a high degree of self-discipline.

Posted by:CoinYuppie,Reprinted with attribution to:
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