I have written extensively about Apple in the past in the context of people falling in love with a stock and being blind to any possibility that their decision making could be flawed.
This sort of situation which is also being repeated to a lesser degree with gold highlights the myriad of cognitive biases that we as humans possess and which we bring to trading.
The following is a list of my five favourite biases.
1. Optimism Bias.
We all think we are cleverer than we are, in fact we also think we are cleverer than everybody else. So all those people who are madly selling an instrument that we own are just not as smart as us and are simply not switched on to the brilliance of our analysis.
2. Loss Aversion.
Traders are extremely loss averse. This is understnadable in light of our first biases – we cant ever possibly be wrong in our judgement so their is no need to admit you are wrong. Loss aversion selects for inaction – if we take no action we do not have to confront the notion that we may be wrong.
3. Confirmation Bias.
Only those things that confirm my opinion are correct (ask any politician) We tend to get the logic of decision making backwards. In reaching a decision we are supposed to carefully analyse facts and then generate a conclusion. Unfortunately, most of the time the conclusion comes first and then the facts are arranged to suit the conclusion.
4. Sunk Costs.
This is the notion that often powers averaging down. It the fallacy of investing money in a position that is going south because you have already invested so much already. In part this problem is related to anchoring, instead of anchoring on the initial purchase price and hence the initial stop poor traders anchor emotionally on either the stocks last price or their last entry.
5. Overvaluing What Is Yours.
I own it therefore it must be good, also known as my baby couldn’t possibly have a head like a smashed crab.
If you were wondering this is what Apple looks like as of last night.