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Why "average down" comes naturally to the average Joe?
- Thread starter turkeyneck
- Start date
Quote from turkeyneck:
You tell them to "average up" or "cut loss" and they think you are a loonie. Any idea?
The behaviour of the Public has always baffled me. Rarely can you elicit an explanation from them. I think what hppens is they buy the propaganda form those iwth stocks to sell just like they buy gummint propaganda.
Averaging down with a plan is one thing, but how many have a plan?
For most, I would guess that the reason why averaging down is attractive is because of the cognitive bias called loss aversion.
Simply put, by averaging down, one puts off taking a loss.
Averaging up actually makes better sense in a trending market, but that is not intuitively comfortable for the same reason.
Loss aversion makes one want to take profits immediately and to play with losses.
Traders who do not overcome this cognitive bias are destined to underperform in the long run on a risk/reward basis. They will struggle to keep their accounts making new highs. Their accounts will on occasion make new highs, but then one bad trade will wipe out months or more of profits.
After the losses, they will play small and frightened, like a turtle.
To get off of the cycle, one has to overcome loss aversion.
For most, I would guess that the reason why averaging down is attractive is because of the cognitive bias called loss aversion.
Simply put, by averaging down, one puts off taking a loss.
Averaging up actually makes better sense in a trending market, but that is not intuitively comfortable for the same reason.
Loss aversion makes one want to take profits immediately and to play with losses.
Traders who do not overcome this cognitive bias are destined to underperform in the long run on a risk/reward basis. They will struggle to keep their accounts making new highs. Their accounts will on occasion make new highs, but then one bad trade will wipe out months or more of profits.
After the losses, they will play small and frightened, like a turtle.
To get off of the cycle, one has to overcome loss aversion.
Quote from smilingsynic:
Averaging down with a plan is one thing, but how many have a plan?
For most, I would guess that the reason why averaging down is attractive is because of the cognitive bias called loss aversion.
Simply put, by averaging down, one puts off taking a loss.
Averaging up actually makes better sense in a trending market, but that is not intuitively comfortable for the same reason.
Loss aversion makes one want to take profits immediately and to play with losses.
Traders who do not overcome this cognitive bias are destined to underperform in the long run on a risk/reward basis. They will struggle to keep their accounts making new highs. Their accounts will on occasion make new highs, but then one bad trade will wipe out months or more of profits.
After the losses, they will play small and frightened, like a turtle.
To get off of the cycle, one has to overcome loss aversion.
in other words
no pain no gain
the oldest adage in ws is also a gem of wisdom.
Investment advisors and the investment community operate under the thesis that the market will never go down in the long-run. They have 30-50 years of nicely cut data to prove this that they show potential clients. Therefore, if markets never go down in the long-run then an averaging down strategy will always win.
Averaging down as an investment philosophy makes sense, if you are an experienced investor and you are doing it with fairly solid companies.
Averaging down as an investment philosophy makes sense, if you are an experienced investor and you are doing it with fairly solid companies.