Opinion: How to make more money in the stock market: Put away your computer
Following the short-term gyrations of the market is linked with worse performance
CHAPEL HILL, N.C. (MarketWatch) — Want to know the secret to making more money in the stock market?
It's simple: Just turn off your computer and put away your smartphone.
I'm not kidding. A new study from the National Bureau of Economic Research, published this month, finds that traders who pay the closest attention to the stock market's short-term gyrations significantly underperform those who pay infrequent attention. (See chart.)
The reason for this surprising contrast, according to the study's authors: Traders who pay the closest attention to the market's short-term movements tend to be more conservative, allocating less money to risky assets and, therefore, earning a lower profit over time.
"Professional traders who receive infrequent price information invest 33% more in risky assets, yielding profits that are 53% higher, compared to traders who receive frequent price information," the researchers report.
Why would your risk tolerance fall because of the seemingly benign act of paying frequent attention to the markets and your net worth? The answer can be traced to a famous psychological theory formulated years ago by two behavioral economists: Shlomo Benartzi, an accounting professor at UCLA, and Richard Thaler, a behavioral economist at the University of Chicago.
They hypothesized the existence of a behavior pattern they called "myopic loss aversion," which results from two personality traits that almost of us possess:
• We hate losses more than we love gains.
• Given the chance, we look to see how our investments are doing.
The implication is that those who pay the closest attention are more conservative, since their frequent reviews greatly multiply their subjective experiences of loss, which they hate.
This new study by the Cambridge, Mass.-based National Bureau of Economic Research is one of the first to empirically confirm the existence of myopic loss aversion (MLA). The authors — John List and Robert Metcalfe of the University of Chicago and Francis Larson of Normann, a London-based behavioral-research firm — studied the buy-and-sell decisions of professional traders.
Is there an antidote to MLA?
Since we can't really change our psyches to make us hate losses any less, the only realistic antidote is to pay less frequent attention to the markets and how our portfolios are doing. Hence my advice at the top of this column.
Still, I seriously doubt that many of you will follow that advice. After all, we find it almost impossible to resist the temptation to see if we have made or lost a lot of money over the last few minutes/hours/days. In fact, this temptation has become even more irresistible in recent years, as smartphones enable Nervous Nellie investors to satisfy their temptations with little more than a swipe of their fingers.
If you don't follow the advice to pay less attention to how your portfolio is doing, then you need to find some other psychological defense mechanism. My wife, a clinical psychologist with a fondness for using Greek mythology in her therapy, analogizes your task to that facing Ulysses when his ship was sailing by the Sirens. He knew he would be unable to resist their alluring singing, and yet he also knew that succumbing to that temptation would be fatal. So he had his men tie him to the mast of the ship on which he was sailing so that he could listen to the Sirens' songs and still be able to resist.
Today that might mean deactivating all smartphone apps that allow you to make changes to your portfolio.
That's just one idea. But, regardless, we need to figure out the investment equivalent of what Ulysses did.
Posted by: sarah_oz@yahoo.com
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