I caught myself again yesterday. I was having coffee with an ex-colleague of mine. Back from the phase in my life when I was doing my ‘corporate duty’. I do like to occasionally check in with my ex-colleagues to see whether the corporate life has improved since I had left three years ago. And it …
But I am digressing.
Anyway, my colleague asked me how my life as an investor (and occasional trader) is going. Absentmindedly I shared some of my successful trades. And that was it!
I only shared my wins and did not mention any of my numerous learning experiences. I do prefer to refer to my losses as learning experiences. It has a more positive vibe to it that way. (“Sometimes you win, sometimes you learn”).
This fact of my all-too-lopsided answer to his question dawned on me only on my way home.
So, back home I checked my mighty external brain (aka Internet) for some proof on whether I am normal and whether there is a specific term for this cognitive bias.
The good news is: Apparently everyone shares their successes more than their failures.
The bad news is: This Self-Enhancing Transmission Bias leads to a false perception of reality and inability to accurately assess situations.
Well, talking about how successful we are is a good way of maintaining our own self-image and of enhancing our reputation. Generally we prefer to present ourselves in as positive a light as possible short of actually lying: but selective omission of information, like failing to mention the 51% of trades we made that went wrong, seems to be acceptable to most of us.
In a social context most people who exaggerate their abilities will tend to be found out though. – Sharks, no chance to escape here.
But the more remote the social interaction the harder it is to detect. – Yeah, that’s easy. After all I have not lied, right?
As Jason Zweig remarked: “Being right is the enemy of staying right — partly because it makes you overconfident, even more importantly because it leads you to forget the way the world works.”
And how does the world work in regards to novice investors and traders?
We do look for ideas on the world wide web – who doesn’t sporadically lack creativity or initiative – pick our Gurus and follow them.
Could it be, however, that those Gurus do only share their success stories and suffer from convenient amnesia when it comes to write about their failures?
According to the research they do. All of them.
Lesson: If you get your trading ideas by following people on the internet who tell you that they’re great at investing, you have only yourself to blame for your losses.
Don’t do it.
Avoid future crashes.
By the way, this self-enhancing transmission bias is at the root of many of our (potential) crashes. Here is another example.