How did you invest? Why it is repeatedly wrong
Article by: Nipapan Poonsatiansup, CFP® Dependent Financial Planner
We often think that we make a logical decision. But, the financial decisions of investors are often biased by emotions and psychology. Behavioral Finance is an alternative way of describing these studies. By using psychology of investors to help explain the decision and behavior that mergence in the stock market. From the past research found that decision-making behaviors of investors are mainly caused by bias. The interesting biases are as follows.
Loss Aversion, many researchers found that losing power is about twice as gaining. This inclination leads to avoiding risk. This tendency will lead to risk aversion in situations where loss-gain is likely to be equal because we prefer to avoid losing more than we gain. In addition, hate this loss. We are sorry to lose 100 baht more than glad that we make 100 baht.
This prejudice will affect investors, as investors choose to hold their shares for too long. (Instead of selling out If it is a stock that has no future), then sell the stock with profit too fast. Because we do not want to loss. Because our brain interpreted that loss is fail itself.
Sunk-Cost Fallacy is the cost that we paid in the past. And whether the present or future events will change. We cannot call this cost back. It is a bias often found in everyday life, such as if we buy a concert ticket for 3,000 baht to the concert. Then we are sick. We must decide whether to go to this concert or not. If we go, it will get worse or not. And when compare the sickness with the fun that we will get from the concert. But many people choose to go to the concert because of the money that already paid. Even it can make our illness worse. If we make a reasonable decision. The cost of tickets is sinking. Should not be considered. But as told We often decide with emotion rather than reason.
Another example is the obvious. When we bought the stock. The stock price we bought is considered a sink cost. The factors that we need to consider whether to hold this stock are fundamentals of Business, growth and the profitability of the business in the future. If you consider that this stock is no future, we must sell it.But most investors do not cut the sale because of the cost of the purchase itself. (Which is already sink) Making the wrong decision and lose the opportunity to invest in better stocks.
But most investors do not cut the sale because of the cost of the purchase itself. (Which is already sink) Making the wrong decision and lose the opportunity to invest in better stocks.
Choice-Supportive Bias: it is very common for us to believe ourselves and tend to ignore other ideas.
We will try to find many reasons to support and defend our first decision.
Because by nature, we often do not admit that we make the wrong decision. Most people cannot make decision to sell the stock that already lost. Because we I don’t want to admit that we made a mistake. Trying to find a reason to support. For example, the stock price is just temporary down and the price will go up again or it will make a profit later, etc. That may cause more losses than it is.
The important reason we must learn about financial bias. Because most people think logically but often make decision with emotion. (Both conscious and unconscious) Accept that we often use emotions to make decisions. This make us realize that when emotions are involved, it can make our decisions ineffective. Especially the investment decision. We need to constantly monitor own investment decisions. There are likely to be various financial biases or not. Because of these biases, our investment decisions are not as we expected.
Also, when we know that we all have a bias when to investing, therefore, we will find ways to manage our investment more effectively. To reduce the bias in the investment by using the system to help in the investment.
For example, making a Dollar Cost Average (DCA) or a regular investment, such as investing in a fund monthly by automatic debit. This kind of investment will help us discipline our investment. And can eliminate the investment bias.