Wednesday, September 01, 2010

Sometimes Investing is Like Tennis

If a first serve doesn't go in, top male tennis players would usually rack up more points delivering another top-speed first serve, not a conventional, slower second serve.

As this NY Times story explains, players ease up on their second serve because a double fault would instantly lose the point. They're taught to "get the ball in play" and hope for the best. Problem: Many opponents seem to return a second serve faster than it arrives. Result, the server loses about half his second-serve points.

Broadly speaking, tennis players prefer to defer risk of loss, even though it is not to their long-term advantage. See any investment parallels?

And sometimes investing is like driving on a congested interstate highway. Frequent lane-changers think they're switching into a faster-moving line of traffic. A study by Dr. Donald A. Redelmeier found that drivers' perceptions are often wrong. All the lane-changers accomplish is a tripling of their risk of an accident. Know a few stock or commodity traders who fill that bill?

See Think the Answer's Clear?

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