Is a skewed risk preference holding you back?
In trading, business, and life… it pays to understand some of the mental software that may be running in the operating system of your mind.
See, one of the reasons it is so difficult to stick to one project or strategy is because the human mind is not wired to think in long term probabilities. We are not fundamentally wired to play a strategic long game. Rather, we are designed to think in terms of survival and self-preservation.
It is basic human nature to prefer immediate gratification over delayed gratification.
In the wild, this may give you a strong advantage… but in the dynamics of success, employing your primate instincts will hold you back. Let me demonstrate with a survey.
Would you prefer:
a) A sure gain of $700
b) A 75% chance of gaining $1000 and a 25% chance of gaining nothing
84% of people chose option A because they tend to be risk-avoiding when it comes to gains, preferring to hold onto the “bird in the hand”. Once they have something, they are violently opposed to risk losing it.
Let’s try another one, would you prefer:
c) A sure loss of $700 or
d) A 75% chance of losing $1000 and a 25% chance of losing nothing
87% of people chose D because they tend to be risk-seeking when it comes to losses. Thus they would rather risk a possible big loss in preference to suffering a certain moderate loss. This is how gamblers get hooked. Once they have made a loss, they keep gambling (sometimes in even larger stakes) in trying to avoid realizing the loss.
By applying these probability formulas, you will find that options B and C are mathematically better decisions. The hard part here is re-training your subconscious mind to recognize this and to start taking action in line with probability. Naturally, this comes with time and experience. These principles are not exclusive to trading. In fact, many successful entrepreneurs and businesses use this structured thought process in their decision-making process each and every day.
I understand the long term viewpoint of taking risk. AND I do not gamble in Las Vegas and I LIVE IN LAS VEGAS!