Some factors play a role in why so many people fail to succeed in trading and investing. Many experts claim that nearly 90% of investors fail after reading hundreds of books about investing. The failure rate of traders is far higher. Have you ever wondered why? One of the reasons for this is that we have psychological disorders that influence our ability to make sensible decisions. When a person faces difficult-to-make proper-decision scenarios, these cognitive biases emerge naturally.
Pareto Principle in Trading
That is why many experts say that to succeed at something, use an 80/20 approach that consists of 80 per cent psychology and 20 per cent methodology. The Pareto Principle refers to the 80-20 rule. According to Investopedia, in investing, the 80-20 rule states that 20% of a portfolio holdings account for 80% of its growth. Conversely, 20% of a portfolio holding may account for 80% of its losses.
Another strategy is to concentrate a portfolio on the 20% of stocks that account for 80% of the market returns. But no matter how effective the strategy and system a person uses, they are still unlikely to win if they cannot manage the psychological biases occurring naturally to an individual. This situation commonly occurs for everyone, not just investors and traders.
Sunk Cost Effect Explained
Because it is already costly, the sunk cost effect encourages you to follow or do something even if you don’t want to or against your will. That is why some individuals watch movies even if they don’t want to, eat the food even if it tastes horrible, and hide their clothes even if they aren’t getting worn. They’re also the ones who keep their investments even though they’re losing money. It’s because they’re remorseful for not taking advantage of an opportunity.
That feeling is typical for any human being if you think about it. However, such actions are detrimental to investors and traders. Assume you buy a coin with the expectation of it increasing in value. You’ve already invested a significant sum of money in this coin. However, the value of the coin you’re keeping is still low after a few months or years. You may have also observed that the value of other currencies identical to it has already climbed.
The majority of traders who encounter the sunk cost effect continue to believe. They stick there and hold the coin they bought rather than reducing their losses and buying other cryptos that are certain to profit. They don’t have confidence since they’ve already squandered it. They are dissatisfied because the money they put in has gone to waste.
How Traders React
The majority of inexperienced crypto traders who become trapped because of this phenomenon seek help from expert crypto traders. They use trading tools to connect with the finest brokers in the business. Bitcoin Revolution is an example of this. Others chat to their support group or co-traders simply who have or are currently experiencing the sunk cost impact.
Sunk Cost Effect and Loss Aversion
Loss aversion is strongly related to the sunk cost effect. Loss aversion is a psychological and emotional phenomenon when people consider loss (real or potential) more painful than an equivalent gain. To put it another way, the intensity with which we feel or think when we lose differs from that with which we feel or think when we win. We tend to become biased. So, what does this have to do with the sunk cost effect?
The fear of losing is at the basis of both of these psychological biases. The failure we predict has an impact on our trading selections. Most traders have a hard time accepting failure. As a result, we stick to our preferences and become biased.
To Sum it Up
The ability to move on quickly is essential in crypto trading. If you know you still do not have such a trait, you better slow down in entering the crypto world. Conduct personal research first before starting to trade.