Every one makes investment mistakes. From the time we were born, we learned from the mistakes we made. As investors, we need to learn from our investment mistakes by recognizing when we make them and make the appropriate adjustments to our investing discipline. When we make a losing investment, do we recognize our investing mistake and learn from it, or do we attribute it to some outside factor, like bad luck or the market? To make money from your investments and beat the market, we must recognize our investing mistakes and then learn from them. Unfortunately, learning from these investing mistakes is much harder than it looks.
Some of you may have heard of this experiment. It is an example of a failure to learn from investing mistakes during a simple game devised by Antoine Bechara. Each player received $ 20. They had to make a decision on each round of the game: invest $ 1 or not invest. If the decision was not to invest, the task advanced to the next round. If the decision was to invest, players would hand over one dollar to the experimenter. The experimenter would then toss a coin in view of the players. If the income was heads, the player lost the dollar. If the income landed tails up then $ 2.50 was added to the player's account. The task would then move to the next round. Overall, 20 rounds were played.
In this study there was no evidence of learning as the game went on. As the game progressed, the number of players who elected to play another round fell to just over 50%. If players learned over time, they would have realized that it was optimal to invest in all rounds. However, as the game went on, fewer and fewer players made decisions to invest. They were actually becoming worse with each round. When they lost, they assumed they made an investing mistake and decided to not play the next time.
So how do we learn from our investing mistakes? What techniques can we use to overcome our "bad"…
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