Market Timing Takes Discipline

A reader makes a smart point about market timing—it takes discipline.

The problem is having the fortitude to act with same set of composure when your stocks are down 50%. Many buy and hold people throw in the towel at the darkest hour. Investor psychology is a set of decision theory than many people will not act correctly given the set of circumstances of being down a lot of money. I read a study that view reactions to money in several sets of outcomes and when people lose money it is far more detrimental than when they have won money.

This is exactly right. Emotions are the enemy of a successful investor. Many people think that a falling market is somehow being mean to them, so something must be done to show their feelings.
The economists Daniel Kahneman and Amos Tversky helped develop the field of behavioral economics. Kahneman won the Nobel Price a few years ago, although sadly, Tversky died before he could be recognized. The two found that people’s decisions about risk aren’t always entirely rational.
For example, let’s said you had a choice: You could either accept $1,000, OR you could take a 50-50 shot of winning $2,500. Which would you choose? Most people would take the $1,000 with certainty even though the expected return of the other choice is $1,250. Why is this? Well, people aren’t coldly rational when they’re faced with risk. They tend to hoard what they have, and underappreciate what they could have. It’s an interesting way to think about human behavior.

Posted by on December 14th, 2005 at 9:44 am


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.