How even after knowing everything about your work, a series of emotional judgments can place you in a difficult situation.

A thread on how loss Aversion causes us to take irrational decisions-
An experiment by professor Bazerman of Harvard.

On the first day of class, Professor Bazerman announces a game that seems innocuous enough. Waving a twenty-dollar bill in the air, he offers it up for auction.
Everybody is free to bid; there are only two rules. The first is that bids are to be made in $1 increments. The second rule 30 The Swamp of Commitment is a little trickier.

The winner of the auction, of course, wins the bill. But the runner-up must still honor his or her bid,
while receiving nothing in return.

In other words,this is a situation where second best finishes last. Indeed, at the beginning of the auction, as people sniff out an opportunity to get a $20 bill for a bargain, the hands quickly shoot up, and the auction is officially under way
A flurry of bids follows. As Bazerman described it, "The pattern is always the same. The bidding starts out fast and furious until it reaches the $12 to $16 range." At this point,
it becomes clear to each of the participants that he or she isn't the only one with the brilliant idea of winning the twenty bucks for cheap.

There is a collective hard swallow. As if sensing the floodwaters rising, the students get jittery.
"Everyone except the two highest bidders drops out of the auction," Bazerman explained.

Without realizing it, the two students with the highest bids get locked in. "One bidder has bid $16 and the other has bid $ 17," Bazerman said.
"The $ 16 bidder must either bid $18 or suffer a $16 loss."

Up to this point the students were looking to make a quick dollar; now neither one wants to be the sucker who paid good money for nothing.
This is when the students adopt the equivalent of football's war-of attrition model. They become committed to the strategy of playing not to lose.

Like a runaway train, the auction continues, with the bidding going up past $ 18, $19, and $20.
As the price climbs 31 higher, the other students don't know whether to watch or cover their eyes.

"Of course," reflected Bazerman, "the rest of the group roars with laughter when the bidding goes over $20."
From a rational perspective, the obvious decision would be for the bidders to accept their losses and stop the auction before it spins even further out of control.

But that's easier said than done. Students are pulled by both the momentum of the auction and the looming loss
if they back down-a loss that is growing greater by the bid.

The two forces, in turn, feed off each other: commitment to a chosen path inspires additional bids, driving the price up, making the potential loss loom even larger.
And so students continue bidding: $21, $22, $23, $50, $100, up to a record $204.

Over the years that Bazerman has conducted the experiment, he has never lost a penny (he donates all proceeds to charity).
Regardless of who the bidders have been-college students or business executives attending a seminar-they are always swayed. The deeper the hole they dig themselves into, the more they continue to dig.

This example was from the book, Sway.
This all happened because of Loss aversion bias which even you can relate to as a trader,

When you Buy something at 100 , it goes to 110 and you didn’t sell, when it comes back to 105 you cant sell,and then you sell it way lower. because you felt again it will go up.
Instead of closing the trade and cutting his losses, the trader continues to wait it out, afraid of losing the money he has already invested. He tells himself he will get out once he loses a certain amount of money,
but instead of that happening, he holds the trade and let the loss grow.

Traders feel loss 2X the emotions we feel when we are in profits.

How to avoid loss aversion bias-

1. Think of long term instead of short term results.
2. A simple way to tackle loss averse is to remind ourselves to ask what the worst outcome would be if the course action was taken.

Usually, this helps individuals put loss, and the strong associated feelings of loss into perspective and better rationalize if it’s worth making
a decision or not.

Trading is not only about the conditions those who win from their emotions and biases win in trading.

Thanks for reading till here.

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More from @Traderknight007

15 Dec
Overthinking - The art of creating problems which weren't even there.

Thread on How Over-analysis leads to decision Paralysis- Image
What is Analysis paralysis?

In simple terms, analysis paralysis is a person's tendency to over-analyze or over-think upon a decision to such an extent that he/she fails to make a choice resulting in a paralyzed state of inaction. Image
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Thread-
1. Accumulation phase-

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In this phase the furious selling activity of downtrend comes to a rest.

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Sometimes it takes years for a stock to come out of this phase.
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Patience , A quality needed to be successful in markets.

But when the real capital is put at risk, The patience goes for a toss.

Thread on Why Emotions overtakes patience -
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Decisions are taken by either the Higher mind (Frontal lobe) or the Fear based mind .

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A man found an eagle’s egg and put it in a nest of a barnyard hen.

The eaglet hatched with the brood of chicks and grew up with them.

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He scratched the earth for worms and insects.

He clucked and cackled. And he would thrash his wings and fly a few feet into the air.

Years passed and the eagle grew very old. One day he saw a magnificent bird above him in the cloudless sky. neighbour
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The old eagle looked up in awe.

“Who’s that?” he asked.

“That’s the eagle, the king of the birds,” said his neighbor. “He belongs to the sky.
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11 Dec
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What Causes You to Give It All Back?

Thread- Image
1. Euphoria-

It is the state of mind in which we can not perceive risk, In state of euphoria nothing can go wrong.

So when you are in this state of mind, you feel invincible and there is nothing in the world which can stop you from making money. Image
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"Start your Trading day with a fresh and empty mind."

Ever faced stress and strong emotions after having loss day and under-performance for a long time after that?

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Poker players calls it TILT.

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When normally you have a stressful day (not in trading) and you go to bed with a bad mood, the next day you wake up fine without much stress .
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The brain absorbs and digests all the emotions.

But, when you have a big emotional and loss day , and then a sleepless night, the brain cant digest those emotions as easily.
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