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Avoid the Tempting Stock Picks

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If they're simply irresistible, they're probably just a tease.

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A great market coach, a famous financial blogger, and a dear friend, Dr. Brett Steenbarger recently wrote this piece on trading and response inhibition, which I highly recommend to fellow Minyans.

In his words:

Response inhibition is the ability to suppress actions that are no longer useful, so that attention and behavior can be channeled more fruitfully elsewhere.


In this note, he reiterates what I say often in my trading notes -- the application of knowledge in order to not do certain things. Here's what I wrote about Research in Motion (RIMM) recently, noting that's it's been a bearish play since September 25. (Editor's Note: The following was excerpted from the Buzz & Banter on November 2, 2009 .):

I usually advocate knowing about "short-patterns" even though the intent might be to never engage in short-selling. I believe that the easiest application of this knowledge lies in not going long such patterns.


Speaking of response inhibition, for the longest time, I've taken what I thought was the most "unprofessional stance" by simply taking enticing stock symbols that I felt I shouldn't be trading off my screens, in order to not be lured into trading them. (These could be stocks that don't meet technical criteria or have simply gone up too far too fast and hence "feel worthy of a short position").

Wouldn't a "stronger person" simply be able to resist such temptation? In my case, I noticed that staring at such "set-ups" made me confident enough to act, many times without an edge.

Thankfully though, this self-professed weak stance of mine was validated by a recent study from Kellogg School of Management "that demonstrated that individuals believe they have more restraint than they actually possess" and concluded:

The key is simply to avoid any situations where vices and other weaknesses thrive and, most importantly, for individuals to keep a humble view of their willpower.
-- Loran Nordgren


I often talk about restraint bias in my Trading Workshops, but do you really think that this restraint bias manifests itself in only trading- and market-related activities?

If you've ever walked by the bakery aisle in a grocery store at 5 p.m. and walked out with an impulsive purchase of scrumptious brownies (check), or listened to a song that you didn't even like several times and ended up buying it on your iPod (AAPL) (check), or bought something from a late-night infomercial (thankfully not checked), you've been hostage to restraint bias.

Summing up the above discussion, at all such times, we overestimate our capability of resisting temptation. And hence, avoiding temptation is easier than overcoming it!

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No positions in stocks mentioned.

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