Probability theory: Independence, Psychology: Regret theory
Social media provides access to quality content analyses, but you see rookie traders who make good money, losing it all in one trade!
In the past few days, I predicted 4 potential stocks to be candidates for the next pump and one call option with decent gains.
WISH, VLDR, QS, and OCGN, made double-digit returns, and the AAPL call option made a +100% gain. A minority of my followers invested in these ideas and won big. Those who are chasing a higher level of adrenalin bought options on some of these ideas! Now I see this phenomenon creating a bigger problem for the majority of my followers. The famous sense of FOMO(Feeling Of Missing Out). This Feeling Of Missing Out could become a dangerous situation!
How?
let me explain it from a mathematical point of view:
Probability theory: Independence
Independence is a fundamental notion in probability theory, as in statistics and the theory of stochastic processes.
Two events are independent, statistically independent, or stochastically independent if the occurrence of one does not affect the probability of occurrence of the other (equivalently, does not affect the odds). Similarly, two random variables are independent if the realization of one does not affect the probability distribution of the other.
When dealing with collections of more than two events, a weak and a strong notion of independence needs to be distinguished. The events are called pairwise independent if any two events in the collection are independent of each other while saying that the events are mutually independent (or collectively independent) intuitively means that each event is independent of any combination of other events in the collection. A similar notion exists for collections of random variables.
The name "mutual independence" (same as "collective independence") seems the outcome of a pedagogical choice, merely to distinguish the stronger notion from "pairwise independence" which is a weaker notion. In the advanced literature of probability theory, statistics, and stochastic processes, the stronger notion is simply named independence with no modifier. It is stronger since independence implies pairwise independence, but not the other way around.
A simple Example:
Rolling dice:
The event of getting a 6 the first time a die is rolled and the event of getting a 6 the second time is independent. By contrast, the event of getting a 6 the first time a die is rolled and the event that the sum of the numbers seen on the first and second trial is 8 are not independent.
Psychology:
What Is Regret Theory?
Regret theory states that people anticipate regret if they make the wrong choice, and they consider this anticipation when making decisions. Fear of regret can play a significant role in dissuading someone from taking action or motivating a person to take action. Regret theory can impact an investor's rational behavior, impairing their ability to make investment decisions that would benefit them as opposed to harming them.
Regret theory refers to human behavior regarding the fear of regret, which stems from people anticipating regret if they make the wrong choice.
This fear can affect a person's rational behavior, impairing their ability to make decisions that would benefit them as opposed to those that would harm them.
Regret theory impacts investors because it can either cause them to be unnecessarily risk-averse or it can motivate them to take risks they shouldn't take.
During extended bull markets, regret theory causes some investors to continue to invest heavily, ignoring signs of an impending crash.
By automating the investment process, investors can reduce their fear of regret from making incorrect investment decisions.
Conclusion:
No matter how you trade or who you follow, the odds of success in any trade are independent..! It means even though we had 5 successful trades in a row, the next one has a 50% chance of being a failure!
What saves us is Risk Management, and having a stop loss which works as emergency exits in the building!
Do not let FOMO overrule your trading strategies
Kenny Rogers:
You got to know when to hold 'em, know when to fold 'em. Know when to walk away and know when to run.
Moshkelgosha
Reference:
1- https://en.wikipedia.org/wiki/Independence_(probability_theory)
2- https://www.investopedia.com/terms/r/regrettheory.asp
In the past few days, I predicted 4 potential stocks to be candidates for the next pump and one call option with decent gains.
WISH, VLDR, QS, and OCGN, made double-digit returns, and the AAPL call option made a +100% gain. A minority of my followers invested in these ideas and won big. Those who are chasing a higher level of adrenalin bought options on some of these ideas! Now I see this phenomenon creating a bigger problem for the majority of my followers. The famous sense of FOMO(Feeling Of Missing Out). This Feeling Of Missing Out could become a dangerous situation!
How?
let me explain it from a mathematical point of view:
Probability theory: Independence
Independence is a fundamental notion in probability theory, as in statistics and the theory of stochastic processes.
Two events are independent, statistically independent, or stochastically independent if the occurrence of one does not affect the probability of occurrence of the other (equivalently, does not affect the odds). Similarly, two random variables are independent if the realization of one does not affect the probability distribution of the other.
When dealing with collections of more than two events, a weak and a strong notion of independence needs to be distinguished. The events are called pairwise independent if any two events in the collection are independent of each other while saying that the events are mutually independent (or collectively independent) intuitively means that each event is independent of any combination of other events in the collection. A similar notion exists for collections of random variables.
The name "mutual independence" (same as "collective independence") seems the outcome of a pedagogical choice, merely to distinguish the stronger notion from "pairwise independence" which is a weaker notion. In the advanced literature of probability theory, statistics, and stochastic processes, the stronger notion is simply named independence with no modifier. It is stronger since independence implies pairwise independence, but not the other way around.
A simple Example:
Rolling dice:
The event of getting a 6 the first time a die is rolled and the event of getting a 6 the second time is independent. By contrast, the event of getting a 6 the first time a die is rolled and the event that the sum of the numbers seen on the first and second trial is 8 are not independent.
Psychology:
What Is Regret Theory?
Regret theory states that people anticipate regret if they make the wrong choice, and they consider this anticipation when making decisions. Fear of regret can play a significant role in dissuading someone from taking action or motivating a person to take action. Regret theory can impact an investor's rational behavior, impairing their ability to make investment decisions that would benefit them as opposed to harming them.
Regret theory refers to human behavior regarding the fear of regret, which stems from people anticipating regret if they make the wrong choice.
This fear can affect a person's rational behavior, impairing their ability to make decisions that would benefit them as opposed to those that would harm them.
Regret theory impacts investors because it can either cause them to be unnecessarily risk-averse or it can motivate them to take risks they shouldn't take.
During extended bull markets, regret theory causes some investors to continue to invest heavily, ignoring signs of an impending crash.
By automating the investment process, investors can reduce their fear of regret from making incorrect investment decisions.
Conclusion:
No matter how you trade or who you follow, the odds of success in any trade are independent..! It means even though we had 5 successful trades in a row, the next one has a 50% chance of being a failure!
What saves us is Risk Management, and having a stop loss which works as emergency exits in the building!
Do not let FOMO overrule your trading strategies
Kenny Rogers:
You got to know when to hold 'em, know when to fold 'em. Know when to walk away and know when to run.
Moshkelgosha
Reference:
1- https://en.wikipedia.org/wiki/Independence_(probability_theory)
2- https://www.investopedia.com/terms/r/regrettheory.asp
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