A coin flip experiment reveals the reason why 90% of stock traders lose money

Market Today

On March 12, the A-share market experienced volatility and adjustments, with most major indices closing lower. By the end of the day, the Shanghai Composite Index dipped slightly by 0.1% to 4,129.1 points, the Shenzhen Component Index fell 0.63%, the ChiNext Index declined 0.96%, and the Sci-Tech Innovation Board (STAR Market) led the declines with a 1.24% drop. The total trading volume across both markets was 2.46 trillion yuan, down 67.7 billion yuan from the previous day, with nearly 3,900 stocks declining.

Sector performance varied significantly. The coal sector surged against the trend, rising 4.24%, with Yankuang Energy hitting the daily limit and setting a new record high. Wind power, energy storage, and green energy concepts also remained active, with companies like Dajin Heavy Industry and Na Bai Chuan hitting the daily limit. Conversely, previously hot sectors such as defense and military, semiconductors, and AI applications collectively weakened.

Randomness and Cognitive Biases

Imagine this scenario: you flip a coin eight times in a row, and each time it lands on heads. Before the ninth flip, which side do you bet on?

Most people would think that since heads has come up eight times in a row, the next flip should be tails—just to balance things out. But probability theory tells us that a coin has no memory. Regardless of how many times heads has appeared, the chance of heads or tails on the next flip remains 50%. The feeling that “it’s about time for tails” is an illusion—what we call the “gambler’s fallacy.”

Conversely, if heads has come up eight times in a row, many might believe it’s impossible for this to be random, suspecting some bias or trick. But in reality, with enough flips, such streaks are inevitable. It’s unusual, but not impossible.

This simple example reveals a deep contradiction in human cognition: we struggle to accept the accumulation of randomness, yet we constantly seek patterns and certainty within random sequences.

The market is full of such moments. When a sector rises sharply for five days straight, people start talking about a “main trend”; when a stock hits the limit down unexpectedly, everyone rushes to find out “what bad news came out.” We habitually look for reasons behind every fluctuation, as if a wise, omniscient narrator is guiding the market’s every move. But the truth may be that many fluctuations have no deep or intrinsic connection—they are simply manifestations of randomness.

If crises were evenly distributed across months, they wouldn’t be truly random but systematic. The essence of randomness is that events tend to cluster at certain times and be sparse at others. That’s why financial crises often occur in clusters, and why some years are calm while others are turbulent. This “clustering” isn’t a conspiracy or a pattern; it’s just the natural behavior of randomness.

The problem is that our brains are evolutionarily wired to dislike uncertainty, always trying to impose order on chaos. This tendency once helped our ancestors survive—mistaking rustling leaves for approaching predators, preferring false alarms over missed threats. But in the stock market, this bias becomes an enemy. We excel at finding meaning in meaningless data, at identifying “patterns” in random fluctuations, and then weaving stories around them.

For example, when a stock rises continuously, we craft a story of “big players accumulating positions”; when it falls repeatedly, we imagine “capital fleeing.” These stories sound convincing but may simply be misinterpretations of randomness. Just like after eight heads in a row, someone can always claim “a manipulator is controlling the stock.”

Deeper still, this cognitive bias can distort our investment behavior severely. When we interpret random fluctuations as trends or logical signals, we risk making wrong decisions at the wrong times—buying a stock that’s just randomly rising, or panic-selling a good company that’s only experiencing a temporary dip.

True investors must learn to coexist with randomness. This doesn’t mean abandoning analysis but adopting humility: acknowledging that short-term movements are unpredictable, recognizing the noise in the market, and understanding that many apparent causal relationships are post hoc rationalizations.

So, how can we stay rational in a market full of randomness?

First, distinguish signals from noise. Over the long term, a company’s profitability, industry competition, and management integrity are signals that determine stock prices. Short-term price swings, news shocks, and capital flows are mostly noise—they cause volatility but don’t change the underlying trend.

Second, embrace probabilistic thinking rather than causal thinking. Investing is never a certainty of “A causes B,” but a game of probabilities: “If the likelihood of A occurring is high, then allocate accordingly.” Even correct judgments can be disrupted by randomness; even wrong ones can sometimes be profitable due to luck.

Separating process from outcome and adopting long-term probabilistic thinking are marks of mature investors.

Finally, always leave a margin of safety. Since randomness can’t be predicted, prepare for surprises. Buy assets at sufficiently low prices, diversify your portfolio, and keep enough cash on hand. These seemingly conservative practices are fundamental to surviving in an uncertain world.

Investment Message

Markets are short-term emotion voters, but long-term value weighers. True investing isn’t a race against others but growing alongside businesses. Stay rational, stick to your circle of competence, and let time be your ally. The noise behind the price swings will eventually fade, leaving only the intrinsic value of companies to provide the final answer.

Note: Markets carry risks; invest cautiously. This article is based on publicly available information and does not constitute investment advice.