Technical Analysis Plain and Simple: Charting the Markets in Your Language, Second Edition

Taking the Easy Way Out

Behavioral finance is an up-and-coming area of study that seeks to explain why investors do what they do. For example, the average investors would rather book a small profit rather than risk losing it at the same time that they let a small loss develop into a big loss, as many did during the Internet bubble of the late 1990s. Rational people allowed investments to lose 99% of their value because “it’s not a loss until you sell it.”

Of course, that is a silly statement. It also violates one of the oldest mantras in the investment world, “cut your losses and let your profits ride.” After all, would any rational investor hold on to losers while getting rid of winners? Of course not, but that is not what really happens.