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Wednesday, October 22nd, 2014


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These psychological traits could be losing you money right now

You could be losing money right now as a result of succumbing to many different psychological traits, according to Business Insider.You could be losing money right now as a result of following many different psychological traits, according to Business Insider.

Overconfidence

Of all the various psychological hindrances identified by behavioral finance, overconfidence may be the easiest to spot, the media outlet reports. Overconfidence in this context involves people having too much faith in their ability to predict what will happen as a result of their investment choices. One tangible impact of this overconfidence is that many investors are not diversified and their investment portfolios are therefore at a greater risk of fluctuating substantially.

Anchoring

Anchoring is related to overconfidence, and the way that investors use available information to make decisions, according to the news source. As a result of people displaying this trait, they make investment decisions based on the information they have at the time, but fail to reassess all relevant data when receiving news that has a substantial impact on their original expectations.

Representativeness

One pitfall that investors can encounter is the tendency to assume that one piece of information represents something else when indeed that is not the case. For example, simply because a company releases strong earnings for more than one quarter, that does not mean that its next batch of financial metrics will be as strong. Another example of succumbing to this fallacy is assuming that a strong company will always have robust stock performance.

Regret minimization 

Another psychological tendency that can impact an investor is a desire to minimize regret, the media outlet reports. This desire for regret minimization can result in a person not taking the risk they need in order to get their desired returns. Investors should not let bad experiences – for example selling a stock that is valued 20 percent higher than its purchase price only to see it increase further – prevent them from taking risks going forward.

Frame dependence

This concept involves the high chances that individual investors will alter their tolerance for risk based on what is happening in the market. People frequently follow a herd mentality, meaning that they have less risk aversion when the broader market displays the same behavior and greater risk aversion when other investors seek safer assets.

Solution 

One way to overcome these tendencies is to engage in timeless strategies such as diversification, dollar cost averaging and the use of a long time horizon. The aforementioned adverse tendencies are likely to impact people involved in active investing. 

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