One of the biggest trading mistakes (US$1.4 billion LOSS) in history and the psychological reasons behind it
Nick Leeson (Barings Bank, 1995)
He made a loss of US$1.4 billion by trying to hide his losing positions and doubling down instead of accepting the losses.
Psychological reasons:
Loss aversion: Humans feel the pain of losses much more intensely than the pleasure of equivalent gains. So, he increased his position to avoid realizing the loss.
Sunk cost fallacy: He made decisions based on the money he had already lost, not on whether those decisions would help him in the future. He thought, "I have already invested so much money," so he asked, "How do I get back what I have lost?" instead of, "What should I do now?".
Overconfidence: As he had generated large profits previously, his overconfidence grew over time with experience.
Hope bias: His decisions became driven by hope rather than probabilities.
Accept the loss and improve. Never hesitate to accept.
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