The Lake Wobegon Effect

The Lake Wobegon Effect

Published July 7th, 2020

The Lake Wobegon Effect is a cognitive bias and is named after a fictional town called Lake Wobegon. It comes from a radio show in the U.S. called A prairie Home Companion and each show finishes with the words, “All women are strong, all children are smart, and all men are good-looking.”

The Lake Wobegon Effect simply means that we tend to overestimate our abilities.

A survey in the U.S. found that 90 percent of men think they are better than average looking; 93 percent of drivers in the U.S. believe they’re better than average drivers; 88 believe they’re safer drivers than the average. This is a form of cognitive bias; we overestimate our own abilities.

It’s impossible for 90% of people to be better drivers than average.

The same goes for trading; we tend to overestimate our ability to be successful plus we tend to underestimate what’s required to be a successful long term trader.

This is also known as the beginner’s cycle. The Beginner’s cycle is where you go and do a trading course. You follow the rules for 10 trades, have a few losses, some break-evens, a little win, and you basically think there is something wrong with the system, that you can do better elsewhere. So you go to another course. And the same thing happens. You make 10 trades, nothing is really going on so you try another strategy or trading method. And you just go around and around, stuck in the Beginner’s Cycle.

What’s the answer?

Be realistic. You cannot be right all the time. Find a strategy with a positive expectancy then stick with it for the long term.

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