Behavioural Finance Why Investors Go Astray

Behavioural Finance: Why Investors Go Astray

Investment plays a paramount role to build your wealth. While there are various investment options, you cannot throw your caution to the wind.

However, the fact is investing is difficult enough without hurting yourself with poor decisions. This is where you understand about behavioural finance. It is a field of study of how investors make financial decisions and what biases affect their decisions.

Every time you invest your money in something, you need to evaluate the risk and make sure that you will make the most of it, but most of you say that despite being highly ethical and controlled in other areas of life they slip up listening to their inhibitions.

Here are some behavioural finance biases that lead investors to make wrong decisions.

Failing to predict the future

 Individual circumstances play a significant role to make an investment decision. Experts suggest that what works for others cannot work for you.

Covetousness overwhelms investors and you end up losing your money in the end. You often envy growing profits of other investors and as a result may be tempted to buy the same stocks and bonds.

Wait! Here is the catch. Your decision to buy those stocks and bonds can be very late. The company is likely to suffer from losses at the end of the quarter.

A situation is never static. What seems profitable today cannot be profitable tomorrow. A wise investor is one who predicts the future. Do not let your decisions be influenced by the progress of other investors.  

Here is the solution:

  • Broaden your horizon by talking to as many people as you can. You will understand the trend.
  • Talk to people of different emotional states. This will help you avoid making biased decisions.
  • Accept the fact that you need to stick to your investment plan.

Overconfidence

Investors are blurring the boundaries between confidence and overconfidence. Of course, you are proud of your ability to make good investment decisions, but sometimes you overestimate your abilities to make successful investments.

Overconfidence can take a toll on your investment. For instance, you have bought several stocks, but this time prices drop rapidly, contrary to your last analysis – prices would go up. No matter how smart investor you are, you should ignore advice from experts.

In fact, you need to be more prudent with your investment approach if you have funded it with small loans in Ireland such as bad credit accepted loans.

Here is the solution:

  • You need to acknowledge that you do not know everything.
  • Make your decision based on your circumstances as well as expected future conditions.

Market metaphors

News headlines are one of the biggest influencers. Alarming headlines like “Prices fall” make you nervous and good headlines like “Prices surge” make you happy. There is no doubt that the language the media uses can reshape the thinking ability of investors, but you can bear huge losses if you easily get swayed by the language the media uses.

You may assume that news has a role to cause stocks to move up, but the fact is that prices make the news. Headlines tell you the current scenario, not predict the future. Stock prices change because of fluctuation in demand and supply.

Here is the solution:

  • You need to be cautious. Showing interest in news headlines is good to understand the current scenario, but you need to understand that it does not explain changes in prices.
  • Try to avoid being influenced by innocuous words like surged, jumped, dropped, and the like.

Overly enthusiastic about a particular investment

Another common reason why investors go astray is falling in love with a particular trading pattern. Though there are various investment options, you may fall prey to an irresistible feeling of investing in particular stocks.

You may think that these strategies are foolproof, but you lose your logic and make emotional decisions.

Here is the solution:

  • Think strategically. Practical thinking is a must to make the most of your investments.
  • Do not put all your eggs in one basket. The rule of thumb says that you should not invest more than 20% of your holding in one financial sector.

The final word

If you do not want to lose money, you need to be cautious with your every move. A good investor is one who maintains discipline. A financial advisor from Best Loans Land has mentioned above how you can avoid making wrong investment decisions.

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