Sound familiar?

Discussion in 'Trading' started by dbphoenix, Jul 25, 2003.

  1. dbphoenix


    In order to become a top-notch trader, you must have accurate insight into your own limitations. But most novice traders do not. For example, behavioral economist Dr. Terrance Odean has shown that online investors tend to trade beyond their skills. They don't have an accurate picture of what they can and cannot do. These biased exaggerations of abilities are not restricted to traders. It's a widespread phenomenon. Research studies suggest that when it comes to estimating how well you are doing as a novice trader, it is best not to trust your intuition.

    Dr. David Dunning and colleagues (2003), in a recent article in "Current Directions in Psychological Science," argue that most people are "blissfully unaware of their incompetence." This tendency to overestimate one's abilities has been documented in several studies. When people are asked to take a test measuring abilities, such as thinking logically, writing grammatically, and spotting funny jokes, they tend to overestimate their performance: they think they are performing well above average (60% and above), yet they are actually performing in the bottom 25%. This research finding isn't restricted to taking tests. People in a variety of settings and skill areas overestimate how well they are doing. Debate teams in college tournaments wrongly think they are suburb debaters. Hunters think they know more about firearms than they really do, and medical residents think they know how to diagnose patients more accurately than they really can. Studies have even shown that when people are offered money to estimate their performance accurately, they still can't do it.

    Dr. Dunning and colleagues suggest that poor performers are "double-cursed." Not only do they perform poorly, but they also lack the psychological ability to perceive that they are doing poorly. So what do poor performers do compared to top performers? Poor performers start with the belief that they are "good performers" and don't take the time to develop a method to assess their actual performance. Top performers, in contrast, try to gauge their performance accurately, and tend to avoid worrying about whether they are "good performers" or not. Indeed, studies show that they actually underestimate their performance. When they see how others have performed on a similar skill, they are surprised how well they do compared to others.

    Fortunately, poor performers are not doomed to remain at the bottom of the heap. In their experiments, Dr. Dunning and colleagues have shown that when poor performers are shown how poorly they do, and are given instruction on how to improve their skills, they perform better and are more accurate with regard to their performance estimates.

    These studies offer ways that novice traders can improve their trading performance. First, one should be aware that novice traders' intuitive performance estimates are grossly exaggerated and take active steps to ignore them. Second, create an objective log of your trading results, such as a trader diary, so that you know exactly how well you are performing. Third, get some trading instruction to improve your skills (trading coach, mentor, workshops, etc.). As your skills improve, you will perform better and your estimates of your performance will be more accurate. So keep these guidelines in mind. An objective and accurate estimate of your abilities is vital for trading success. Make sure you have one.

  2. I think poor performers tend to develope a numbness that enables them to fail without actually feeling/experiencing the they go on failing without actually feeling it until the which point they've lost almost everything.