In times, when emotional quotient (EQ) is been valued much more significantly when compared to developing IQ, the world of financial investments is not too far away when it comes to acknowledging the importance of investors possessing the trait of emotional stability. Why is it so?
It’s simply to make sure that the crucial decisions taken are based on practically calculated information and not on the basis of emotional biases and weaknesses they carry. Despite of the usual volatility in the stock markets, rationality along with patience is what emotionally stable investors’ exhibit.
Successful investors are not emotional especially when they very well know the fact that when investments are not emotional, there is no logic for them to be emotional too.
Behavioral finance argues that emotions and sentiments play a crucial role in determining the behavior of investors in the market and indeed do affect their overall decision-making.
Lets Analyze Emotionally Driven Investors & Their Behavioral Outcomes -
1| Kicking In Fear Psychosis: When Markets Get Volatile
Are you not ready to digest losses as an investor?
- Emotionally driven investors, indeed get overwhelmed with an inbuilt fear psychosis especially when stocks suffer large losses for a sustained period of time and the overall market gets much more fearful of sustaining further losses.
- It’s guaranteed that when you loose a major portion of your equity portfolio it’s very hard to digest especially the thought that it’s nearly impossible to rebuild the lost wealth ever again. But the fear psychosis kicks in about the prevailing fear of the overall market too if such investor switches towards low-risk, low-return investments also.
- All of this fear is directly proportional to the volatility inherently present in the stock market. When investors find market to be unstable, they become vulnerable to these emotions and become highly reluctant to execute their strategies in accordance with much needed timing.
2| Feeling Regretful: When Prices Goes Down After You Purchased
Is there an underlying need to win a chance gain without much effort?
- Emotionally driven Investor’s behavior showcases that trading patterns involving previously owned stock are driven by a desire to avoid anticipated regret. In layman’s terms investors like you will again buy the same a stock if the sale boosts feelings of satisfaction.
- The anticipated regret largely owes to the fact that such investors actually don’t have a desire to own a stock, but just want to be at the side of the positive growth in the market. Such attitude has also proven to be very risky for investors who take sides only when a particular stock gets matured.
3| Disillusioned Hope: You Still Feel That Losses Will Recover In A Short Time
Are you too eager to make money as quick as possible?
- Some investors make you believe that making money is easy and becoming rich too especially when the market is in a robust mode, you start to believe easy as one has to pick just the right stocks only. Even after loosing heavy chunk of money, you feel the same. However, if these decisions are being made likely with similar approach in long term too, then one is standing on a bleeding edge of the sword.
- Furthermore, such investors start losing their confidence once their portfolio begins to lose money because of false hopes like these.
4| Being In Mode Of Denial: You Want To Keep Holding The Loss Making Investments
Are you willingly keen onto sticking to loss making investments?
- What’s considered to be as an erroneous investment behavior is when emotionally driven investors willingly start ignoring signs that preludes that this particular investment is a baggage and needs to be cut out from once portfolio.
- Also, investors like you sell profitable investments as you are risk averse for incurring losses when prices may dip too low. But, such investor’s overall portfolio will sustain more of losing investments as they sell off profitable investments too early.
- Also, such investor’s holds on to such investments even when practical analysis tells you that you need to cut your losses. This behavioral mode of being in denial of the reality is promulgated by the over-confidence such investors showcase in their forecasting abilities.
5| Sustaining Greed: You Do Not Want To Book Profit
Is there a need to gain more than one gains out of an ordinary profit?
- Emotionally driven investors often get caught in the bowl of greed as they have the desire to acquire as much wealth as possible in the shortest amount of time. Maintaining profitable gains and adhering to stricter investment plans in long term becomes too harder because of this get rich quick mentality.
- Investors like these needs to crucially maintain and stick to the fundamentals of investing especially maintaining investments for longer terms and avoiding from getting caught in temporary craze.
Behavioral Finance also argues that patiently sticking to good investment decisions helps in maintaining your long-term goals and strategies along with controlling your emotions like fear, regret or greed is also very crucial to be a successful investor
Outlook
- Being an emotional investor does not simply showcases that you cannot be successful in the stock market at all. But, for sure it will definitely increase your chances that you will miss out on major gains and potentially lose heavy money if you’re not able to curtail your emotional impulses while making investment decisions.
- Unless you have developed the skill set and also have the time to keep those skills sharp, there are severe costs to making trades based on emotion.
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