What I Learned Losing A Million Dollars by Brendan Moynihan – Are you trying to be right or trying to be profitable? https://wordpress.com/post/ronjoads.wordpress.com/2003


Key points:

  1. Are you trying to be right or trying to be profitable?
  2. Do you know what information/price would get you to believe your position is unprofitable? If not – you are trying to be right!
  3. You can fall into “crowd” psychology with only one person!

More notes

  • Focus on not losing rather than winning
  • Have hooks. An important way to get ahead is to “have hooks” aka favoritism
  • Pick a rigged game. You can either play the system or pick the system – better to pick the playing field (and it be a favorable one!)
  • Biases will impact your decision making:
    1. Overestimate desirable outcomes – you are more likely to overestimate favorable outcomes and underestimate unfavorable ones. Example – 1/1000 in winning lottery vs 1/1000 in struck by lightning… lottery still feels more likely!
    2. Linear thinking bias – interpret the probability of successive independent events as additive rather than multiplicative. Example – In other words, people view the chance of throwing a given number on a die to be twice as large with two throws as it is with a single throw (this is particularly wrong if you are trying to roll a 7!)
  • Are you trying to be right or profitable? You must ask yourself if you are making a bet to be right or to be profitable! Put another way there are not right/wrong bets, just profitable/unprofitable positions.
  • Beware the solitary panic/crowd. You can have crowd-pyschology with only one member! Remember, it is not a function of a quantity of individuals that determines if a psychological crowd has formed. Rather, it is a function of the characteristics displayed. If a person is exhibiting these characteristics, then he is part of a psychological crowd and is making crowd trades.
  • Be formulaic in your approach and manage downside risk.
    • What analysis have you done that makes you believe this is a good approach?
    • How will you get into a position?
    • How long will you stay in that position (time)?
    • For what range of outcomes will you stay in that position (price)? When will you know you have been unprofitable?
    • What information will cause your position to be unprofitable?

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