Investment Psychology and Luck

Is it better to be lucky or good? You make a key stroke error and a trade ends up a winner - that is just luck; but the money you made from it is real. Is that such a bad thing? You probably don’t think so or at least you will feel some sense of pleasure because you profited from it. My guess is you are not going to give the money back or even spend too much time thinking about your stupid key stroke.

You also won’t put measures in place to make sure it doesn’t happen again. Why would you? After all, you made money from it so there is nothing to really worry about. You just got lucky and that’s a good thing, right?

Wrong.

Here is the problem with this lucky event. Because people (and traders especially) respond best to punishments and rewards, then getting lucky and making money actually reinforces bad behavior. It causes you to continue a poor process the next time. Not only are you resistant to learn from this mistake but you actually increase your chances of having it happen again, perhaps with less happy results.

Let’s turn the situation around for a second. What if you made the key stroke error, but this time you lost money and gave back your profits for the month. One stupid, careless mistake and all your hard-earned efforts get wiped away by a single fat finger. Do you feel lucky now? More importantly, you probably will take some time to examine the mistake and put corrective measures in place so it never happens again.

In the first scenario, you benefit from luck and therefore have no incentive to change your behavior. And luck does run out. In the second scenario, you get hurt from the lack of luck and are punished.

So is it better to be lucky or good? From a psychological point of view, I’ll take good over luck, any day of the week and twice on Sunday.

Think better, trader smarter.