Daily Archives: October 7, 2012

Conquer your loss aversion with a systematic strategy

Here’s an interesting article.

Here’s an excerpt.

Evidence indicates that we subconsciously attach our perception of value to an artificial reference point or benchmark (the anchor point), which often has no relationship to the current investment or economic decision.

When we purchase a security, the purchase price becomes an anchor point, which we retain unconsciously as a benchmark of fair value.   When the price of the security increases, it appears overvalued relative to the anchor point, which induces us to sell quickly.  When the price of the security declines, it becomes increasingly cheap relative to the anchor point, making it more difficult to sell.

The unintentional anchor point encourages us to violate one of the most time-honored trading tenets: “cut your losses short and let your winners run.”