Stock Investing and Trading – Don’t Ask, Don’t Tell

by Rich Hamilton

Commitment and Consistency

The best traders and investors take a dispassionate, businesslike approach to their dealing.

One way they achieve this can be likened to the U.S. Military’s current approach to gays – don’t ask, don’t tell.

I wrote a while back about how selective perception can harm our investment performance.

Now I’m going to look at commitment and consistency.

Behavior Manipulation?

Here’s what Robert B. Cialdini had to say about commitment and consistency in his excellent Influence, Science and Practice.

A Study done by a pair of Canadian Psychologists (Knox & Inkster, 1968) uncovered something fascinating about people at the racetrack: just after placing bets they are much more confident of their horses’ chances of winning than they are immediately before laying down bets… Like other weapons of social influence, this one lies deep within us, directing our actions with quiet power. It is, quite simply, our desire to be (and to appear) consistent with what we have already done. Once we make a choice or a stand, we will encounter personal and interpersonal pressures to behave consistently with that commitment. Those pressures will cause us to respond in ways that justify our earlier decision. We simply convince ourselves that we have made the right choice and, no doubt, feel better about our decision (Fazio, Blascovich & Driscoll, 1992).

If you’ve ever visited (or taken part) in internet forums/bulletin boards, you’ll recognize the symptoms.

People buy stocks and announce their purchases to the forum, along with their reasons for buying. Having done so, they’re committed.

To appear consistent (a strong, social imperative) they must then hold onto the stock. If its price falls, rather than selling it, they find reasons to explain away the poor performance and justify their ownership. Some even buy more stock to show how consistent they are.

Internet forums can be a great place to hang out with like minded people, but you should never tell people what you’re investing in. It puts you under social pressure to hold onto investments that, thinking dispassionately, you would otherwise sell.

Investing and trading is as much a mind game as it is anything else. If you’re in the wrong frame of mind, you lose.

To consistently take money out of the stock market, you need to be aware of and act to minimize potential chinks (such as commitment and consistency) in your mental armor.

Summing up: Read widely, invest dispassionately, and keep your mouth shut!