Many Investors Suffer From Illusions Of Validity

As an investor, I always believe we are a rare breed. We are often guilty of being over-confident in our own abilities. Especially when we have some financial education, knowledge or training, we become even more complacent.

The old adage “the pride goes before the fall” has withstood the test of time. Many amateur investors (uncles, aunties, etc.) frequently exaggerate the reliability of their forecasts to friends. They believe if they say it loud enough, often enough, and with convincing certainty, their friends will believe their predictions.

Tversky calls this phenomenon illusion of validity. He asserts that “people are prone to experience much confidence in a highly fallible judgment. Like other judgmental errors, the illusion of validity persists even when its illusionary character is recognized.”

To be frank, it is hard to second-guess the market. Those who claim they know what is going to happen next is fabricating a big lie. As a matter of principle, I don’t have the habit of revealing my short-term trades, even though my friends and relatives have pestered me for tips.

The reason is two-fold. Firstly, it is important to do your homework in studying the numbers and market trend. When you made the decision to purchase a stock, whether it goes up or down, the lessons you learn will make you grow up much faster in the treacherous stock market.

Another reason is that out of ten picks, the pros cannot even guarantee a 50% success rate. The main thing is not to be right all the time but to ensure that in the few instances when you are right, your winnings exceed your losses. That is the name of the game, especially for short-term traders.

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