Share trading and calibration of confidence

Written and accurate as at: 15 August 2010

If you have not read the article on calibration on confidence, you may like to do so before reading this.

Poor calibration of confidence indicates that we are not really aware of what we know and don’t know, therefore leading to either overconfidence or underconfidence. Such a position can lead to costly financial mistakes.

In this article we look at calibration of confidence and trading shares.

There was a sad story recently of a middle aged man who gave up his job and decided he would work from home trading shares.

He had been to a share trading course, bought the software and believed he could generate enough income to feed himself and his family, while gaining all the flexibility that working from home offered.

Things started out alright for the first month of trading, but after that things got a little awkward.

Many people go to share trading seminars with the view that it will help them get off the tools and out of the grind. While this works for some, many are just not suited to dealing with finance and money in this way.

Unfortunately, many people jump into trading shares “boots and all”, before determining what they know and what they don’t know, and what their strengths and weaknesses are.

For this particular man, while he wanted to follow the system with military precision, every now and then he got a little overconfident. He would take a larger position on this, a smaller position on that.

Within 6 to 12 months, it wasn’t going as smoothly as he had hoped. He was feeling the emotional pull of the markets, starting to lose sleep, and trying to recoup losses that seemed to be overtaking the gains.

Before long, he was drawing more and more on the equity in his home to compensate for last week’s poor performance.

Not long after, there was no equity left. Not only did this man lose his money, he lost his self-esteem, he lost himself.

Share trading can be an effective way to build wealth, but it is not for everyone.

Before jumping in boots and all into the next thing, whether it be share trading, property development, or whatever else, find a way to ease your way into it.

By doing so you reduce risk, while giving yourself a chance to know when to be confident and when to seek further knowledge and advice.

Read an article on Interest free loans and calibration of confidence

See the kid who is a little overconfident

The cyclist who lost the race due to overconfidence