The following factual story is from a US University experiment to understand the psychology of success. There has subsequently been many repeats of this experiment by different people in different locations.

The experiment asked people (experiment subjects) to guess the outcome of tossing a coin and measured how many times they guessed correctly and incorrectly.

On probability, if the coin is tossed you have a 50% chance of guessing correctly which way it will end up. The experiment required 500 tosses of the coin and the outcome followed the laws of probability of around half of the tosses producing a correct guess. This probability outcome is fairly well understood by the experiment subjects, and people generally.

In any 500 tosses there is a fairly good chance that you will put together several runs of guessing five or six tosses in a row correctly. This is where the psychology of success kicks in. The experimenters asked the people guessing the outcome of the coin tosses their opinion on how they felt about their own performance at various times during the experiment.

What they found was that when people were having successful runs – four or five or six correct guesses in a row – that they believed that they themselves were responsible for this success. Reasons ranged from, I am getting better at this, to I am now concentrating harder and that is improving my performance.

Remebering that the experiment subjects were fully aware of the law of probability at work in the experiment, with a likelihood of 50% of the outcomes being correct and 50% of the outcomes being incorrect, but believed that their talent and/or ability was attributing to their success. Quite disturbing in its contradiction.

Yet this happens with people investing in the stock market all the time – especially people new to investing and trading. After a winning trade or two or three, the investor or trader begins to believe that they have a special “talent” for stocks and shares. They begin to believe that they are naturally better than the average trader.

Before long, the investor or trader’s belief in their own superior ability begins to result in over confidence – trading too many stocks or trading without properly managing the risk. And the next thing that happens is the Market Slap! The stock market has a nasty habit of slapping down over confident traders with a big loss.

The truth here is that every trade involves risk and every trader should be managing risk. This means protecting your capital and not getting carried away with your successes. Beware the Market Slap!

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