Imagine you’re a contestant on the game show “Let’s Make a Deal.”<\/p>\n
Monty Hall pulls you out of the audience. He waves $2,000 in your face and says, “This is your money. You can take it and keep it right now, or you can trade it for what’s behind the curtain.”<\/p>\n
Of course, you know from a lifetime of watching daytime television that there’s a 50% chance that what’s behind the curtain is an all-expenses-paid trip to Mazatlán – valued at $5,000 – and a 50% chance that it’s something virtually worthless.<\/p>\n
What do you do?<\/p>\n
If it’s me… I’m taking the cash.<\/p>\n
I’m thinking, “I came here with nothing. There’s a 100% chance I’ll leave here better off if I take the money. There’s only a 50% chance I’ll leave here happy if I take what’s behind the curtain. Either way… my life isn’t going to change dramatically. So, I’ll take the $2,000 and be happy no matter what.”<\/p>\n
Here’s another line of thought…<\/p>\n
“I came here with nothing. The worst case is I’ll leave here with nothing. But there’s a 50% chance to increase the return on my prize by 150%. The odds justify that trade. So, I’ll pick what’s behind the curtain.”<\/p>\n
Here’s the thing… there’s nothing wrong with either decision. All that matters is how you view the consequences of the trade.<\/p>\n
Let me explain…<\/p>\n
I’m going to be happy if I get a $2,000 windfall profit. I might be slightly more ecstatic if I win a trip valued at $5,000. But I’ll feel like an idiot if I give up the $2,000 and go home with something worthless.<\/p>\n
So, I’ll pass on “ecstatic.” I’ll take “happy.”<\/p>\n
Not everyone thinks that way – which is why we love watching game shows.<\/p>\n
Let’s apply this thought process to the stock market…<\/p>\n
Every time I close a trade, in the back of my mind, a little voice asks, “What happens if it moves even higher?”<\/p>\n
This is the equivalent of Monty Hall asking if I want to keep the $2,000 or trade it for what’s behind the curtain.<\/p>\n
I know for sure that I’m happy if I close the trade right now. I don’t know if I’ll be happier or feel like an idiot later.<\/p>\n
So, I almost always choose to err on the side of happiness.<\/p>\n
Now… if this is your only time on a game show… if it’s your only chance to make a trade in front of Monty Hall, it’s understandable if you choose what’s behind the curtain.<\/p>\n
After all, it’s your only shot to maximize your gains.<\/p>\n
I get it.<\/p>\n
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