You may want to believe you trade based on objective information, keeping an eye focused intently on your investment goals.💰💴 But you’re human. You buy a stock because you saw a pundit talk about it on television. You sell a stock because it’s lost some value and you’re freaked out.(BITCOIN) 🕯You’ve probably bought or sold stocks simply because it feels good to make a transaction.
Behavioural finance is a new field of study📘💡 that examines this phenomenon. It looks at psychology and emotion, and seeks to explain why markets don’t always go up or down the way we might expect.
If investors are behaving rationally, there are certain events⏰ that should not happen. But they do.There is no rational explanation for these occurrences, but they can be explained by human behaviour. Consider the so-called, “January effect” which suggests that many stocks outperform during the first month of the year. There is no conventional model that predicts this, but studies show that stocks surge in January because investors sold off stocks before the end of the year for tax reasons.
The human psychology is complex➡️↘️↙️🔃, and it’s obviously impossible to predict every irrational move investors might make. But, those who have studied behavioural finance have concluded that there are a number of thought processes that push us to make less-than-perfect investment decisions.
Attention Bias:📈📰 There is evidence suggesting that people will invest in companies that are in the headlines, even if lesser known companies offer the promise of better returns.
Predicting this human behaviour is a key🗝 way to profit from behavioural finance.
If you want to become a better investor, you will want to become less human👺. That sounds harsh, but it will benefit you to take stock of your own biases and recognize where your own faulty thinking has hurt you in the past.😢 Consider asking yourself tough questions, like, “Do I always think I am right?”😤 or “Do I take credit for investment wins and blame outside factors for my losses?” Ask, “Have I ever sold a stock in anger, or bought a stock based on a simple gut feeling?”😳