Speaking of behavioral economics, I have to mention a predecessor in this field. He is Richard Thaler, who won the 2017 Nobel Prize in Economics for his outstanding contributions in behavioral economics. Behavioral economics is not a new science, but a low-key discipline that few people know about. Fortunately, there have been signs of recovery in recent years. So what exactly is behavioral economics? What does it have to do with trading? Next, please listen to me carefully.
Behavioral economics mainly explains some phenomena that are difficult to explain by traditional economics. It reveals many so-called correct fallacies and allows us to re-examine the distance between our cognitive bias and rationality. It is difficult to understand these words literally. If it is explained in pure words, it may be difficult for many people to understand. Here I will simply warm up everyone. From your conventional thinking, does the morning star mean that you are about to enter Ascending channel, if it falls below the morning star, how do you see the next trend? I think many people still think that it is just a feint to deliberately induce us to make mistakes, because this kind of fixed thinking makes us miss opportunities and avoid risks to a large extent. Next, let me explore how cognitive biases affect our trading behavior.
1. Unwillingness to face loss. In behavioral economics, it is emphasized that people always make irrational investment decisions. Let me give you an example to understand how people embody such irrational behavior.
Example 1: Suppose you can make $5,000, or an 80 percent chance of winning $8,000 and a 20 percent chance of losing everything. What do you think most people would do? I think a lot of people would choose the fixed $5,000 even if the other option pays more.
Example 2: Suppose you lose $5,000, or an 80 percent chance of losing $8,000 and a 20 percent chance of keeping your principal. What do you think most people would do? I think most people would choose to gamble and lose $8,000 and keep their capital.
From the above two examples, we can easily see that no matter what the situation is, people are irrational, because they either choose to expect smaller profits or excessive losses. In fact, this reflects a behavior of people when dealing with risks and returns: when dealing with risks, they tend to be risk-loving, and when dealing with returns, they tend to be risk-averse. Therefore, it is not difficult to see that in real transactions, many of our traders are full of mouths to cut losses and let profits surge. In the end, a lot of people got slapped in the face.
In real foreign exchange trading, if the risk and benefit are equal, it is difficult for people to accept the loss psychology. Therefore, people always tend to be conservative in the face of income, so you will often see many traders close their positions as soon as they make a profit, and watch the subsequent market far away from themselves. In the face of losses, traders believe that sooner or later they will move towards where they think, so they are unwilling to cut their flesh. In the end, what you see at most is regret at the beginning.
2. Lack of holistic thinking
Let me give you an example first: If you buy gold at 1800, two things will happen at this time. In the first case, it rises all the way to 1850, in the second case, it can rise to 1900, but it falls back to around 1800 in the middle. What should you do? How do you feel about this situation? I think many people are very happy to see the first situation, and the second is very angry, complaining that they did not sell earlier, and expecting to rise to 1900.
Although the two situations are different, the result is the same. It tells us not to pay too much attention to the process when we consider the problem. In real trading, what we really care about is the beginning and the result. As for the ups and downs, we don't have to be too serious.
3. Anchoring effect
What is the anchoring effect? It means that when people make judgments about something, they are dominated by first impressions or first information. People tend to associate future estimates with past estimates and are susceptible to the influence of others. This effect is actually a cognitive bias that can be seen everywhere.
In real transactions, for example, the U.S. dollar has slowly entered an upward trend after a long bear market. When seeing the U.S. dollar rising, dollar lovers always feel that it can return to its previous strength, but they do not know that no matter whether politics, economy or military have been greatly It is not as good as before, and the currency market has injected too much, which is no longer possible.
4. The endowment effect
The endowment effect is that once you own something, you value it much more than if you don't own it. In the transaction, each of our orders will have a different impact due to habits and trading psychology. For example, you think that the trend of commodity currency will be very strong this year. When you hold commodity currency, you will strengthen its value. When it falls, you will think that it is just a callback and will rebound and continue to rise, so you miss the opportunity to stop loss. And when it goes up, you will miss the best take-profit point because of overestimation, what should you do? Everyone can express their views.
Finally, as a trader, it is very important to receive systematic training before trading and formulate a trading plan, because in this way we can examine ourselves and then correct cognitive biases.
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