Robinhood Steals from the Rich-Wannabes
You’ve probably seen the headlines of everyday people getting wrapped up in Robinhood day trading. With free trades, there’s a low barrier to entry, so why not try?
And in an up market, it’s easy to make gobs of money with your eyes closed.
But inevitably, a black swan day comes along and, like Richard Dobatse, you lose $860k in a single month.
Or, like Alex Kearns, you become despondent and suicidal.
If you want to day trade the market, you’re going to go up against people who spend every waking second thinking and understanding it, and who have done so for decades. Those are the traders that rip the faces off of Robinhooders.
What makes an otherwise rational, smart person look at the vicious, cutthroat world of day trading and say “hey! I can do that, no problem!”
A misunderstanding of the roles of skill and luck.
Fundamentals
A few misconceptions underlie the Robinhood day trader phenomenon:
- “I know it seems like a bubble, but I swear, this time is different.”
- “I’m not one of those stupid Robinhood daytraders — I know what I’m doing.”
- “Those hedge fund managers? They’re not all that smart. I may have a comparative French literature degree, but I can do what they do.”
These misfires stem from a core part of human psychology: we over-attribute others’ results to luck, and over-attribute our own results to skill.
That is, our brains are, by default, nicer to ourselves (“I succeeded because I’m good at it!”) than to others (“they succeeded because they were lucky”).
In behavioral psych, this is called the “Fundamental Attribution Error:”
We fundamentally misattribute the role of luck and skill when observing others, and when observing ourselves.
Re-Attribute
How can you counteract the Fundamental Attribution Error?
A few starting points:
- Simply understanding that it exists and affects you goes a long way.
- When making investing decisions, don’t look to others’ success. You’ll become too rosy-eyed. You’ll have a natural tendency to assume everyone else was just lucky, which makes you believe it’s common to be lucky.
- When thinking or talking about a positive outcome that someone else experienced, ask: what skills would they have needed to make it happen? This will prime your brain to more correctly weight how much ability had to do with the outcome.
- When analyzing endeavors you tried but failed, ask: how could I have improved my skills in a way that increased the odds of success? Use the answers as a playbook for what personal growth areas to work on next.
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Homo Sapiens’ psychology can either limit or enhance your success.
You choose.
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