Chapter 35 · Trading Psychology
The biases, named, with a countermeasure each
Nine documented errors, what each one costs, and the specific rule that blocks it.
These biases are universal; the pressure that triggers them on NEPSE is specific. A market concentrated in one sector, an active tip culture on social media, and a share locked at its upper circuit and unbuyable at any price together produce the strongest fear of missing out most Nepali investors will ever feel.
Knowing a bias exists does not stop it. What stops it is a rule written down before the situation arises, because the bias operates precisely when your judgement is least reliable.
| Bias | What it looks like | The countermeasure |
|---|---|---|
| Loss aversion | Cutting winners quickly, holding losers to avoid realising a loss | Decide the exit before entry, in both directions |
| Anchoring | Treating your purchase price as meaningful to the market | Judge the position on today's evidence, not your cost |
| Confirmation bias | Reading only the views that agree with the position | Write the strongest case against your holding before you buy |
| Recency bias | Assuming the last few weeks describe the future | Look at the same stock across several years before deciding |
| Overconfidence after a win | Sizing up after three good trades | Fix position size by rule, so results cannot change it |
| Sunk cost | Averaging down to justify the first purchase | Ask whether you would open the position today at this price |
| Herding | Buying because a group is excited about it | Require a written reason that does not mention anyone else |
| Disposition effect | Selling the winners, keeping the losers, leaving a portfolio of mistakes | Review the whole portfolio on the same criteria, on a schedule |
| Hindsight bias | 'It was obvious' — which erases the lesson | Keep a journal written before the outcome is known |
Worked: what the disposition effect costs
Six holdings. Three are up 30%, three down 30%. Selling the winners and keeping the losers leaves a portfolio composed entirely of positions that have gone against you — and it is a decision made on the basis of your entry price, which the market has no knowledge of.
- The correct question for each of the six is identical: would I buy this today at this price?
- If yes, hold it — whatever it has done since you bought.
- If no, sell it — whatever it has done since you bought.
- Your purchase price appears nowhere in that question, and that is the point.
The journal, and what it must contain
- 1Before entry: why, the invalidation level, the position size, and the strongest argument against.
- 2At exit: what actually happened, and whether the reason for exiting was the one you wrote down.
- 3Monthly: how many exits followed the plan. That percentage is a better measure of progress than profit, because profit is noisy over short periods and discipline is not.
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