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| Thursday, July 26, 2007 |
| The illogical player |
People tend to gamble when things are going bad and settle for certainty when things are going well. This totally contradicts on the "cut your losses, and let your profits run" axiom.
For example.
Lets say for this scenario, you have 2 choices
A: A certain 9k loss.
B: A 5% chance of no loss and a 95% chance of losing 10k.
Most people would take the chance for breakeven but this is not cutting loss. Why is this so?
For situation B, the expectation is a (0.05 * 0 + 0.95* 10) 9.5k loss. In this case, the hoping of prices to bounce to breakeven causes your losses to be magnified. The logical player should just choose the certain 9k loss, admit the wrong trade/investment, analyze what went wrong, and then move on.
Lets switch the scenario. Again you have 2 choices
A: A certain 9k gain.
B: A 5% chance of no gain and a 95% chance of earning 10k.
Same concept but you would be surprised most would settle for the 9k. This is not an example of riding the profits. If you do the calculations, expection of B is a 9.5k gain and by doing this, you are not riding the profits enough.
In the end once you could quantify your risks and expected returns, your accuracy of selection, you should be able to be a more logical player. For my case, risks are well definied as it is triggered by cut loss. For gains, I am not sure of the targetted price. This is a drawdown of trend following.Labels: NenixDreams Fund |
posted by Nenix @ 11:31 AM   |
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| NenixDreams Fund |
| Fund launchprice on 1st August 2006= $1
Target for 2007 = Beat STI index
Current price of NDF as of 1st Oct 2007 = $1.58
Current price of STI as of 1st Oct 2007 = $1.54
Difference with STI index is 0.04
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