Tue. Dec 7th, 2021

Every human mind is a battlefield. The war between our rational thoughts and our human desires has baffled the greatest minds over the centuries.

In ancient Greece, Plato represented the human mind as a chariot rider trying to control two horses. One horse represented the intellect and the other represented the emotion. The role of the chariot driver is to try to balance the two.

If you specialized in psychology, you could see how Sigmund Freud later took this three-part structure into his own explanation of the human mind.

But you clicked on this article for investment tips, right? Well, the investment world has a lot to do with human behavior, and human behavior is largely governed by the forces we just discussed.

What does trade psychology gain? Are investors more governed by their careful analysis or do most investors go with their “gut?” Let’s take a closer look at business psychology and how it influences your decision to buy or sell.

stock chart

Stock market psychology: the myth of the rational investor

For many years, economists operated with the belief that, deep down, human beings were intrinsically rational. In fact, they even gave a name to this theory: Rational Actor Theory or “RAT”. Basically, this theory argues that individuals rely on accurate and rational calculations to make their financial decisions, seeking to optimize their financial advantage. We only have one question: “Really?”

Most decision-making processes are not as calculated or accurate, even when it comes to making important purchases.

In the Atlantic, Derek Thompson writes about how the process of buying a refrigerator can be an absolute ordeal. Because? Because to make a decision, “you should know the price of all similar refrigerators in the world; the qualities of each similar refrigerator; the durability and reliability of all similar refrigerators; how much it would cost to ship and install all similar refrigerators; and how long it would take to get that perfect fridge with the ideal combination (whatever that means) of price, quality and durability. ”

A purely rational consumer would get lost in the details, especially now that e-commerce allows us access to a functionally unlimited selection of refrigerators.

You can imagine how it would translate into the stock market, where the decision to buy or sell is hampered by the fact that stock prices are in a constant state of flux.

At Gorilla Trades, we believe that investment decisions should be based on the best research available, which is why we offer top-quality resources and tools to guide you through the process.

But we also recognize that trading decisions are often influenced by emotions and “gut feelings,” otherwise investors would be faced with the old problem of paralysis through analysis.

The psychology of trade: what emotions govern our choices?

In the eighteenth century, David Hume declared that “reason” has always been “a slave to passions.” Emotion plays an important role in our decisions and the extent to which it has been the subject of non-historical debate.

We don’t have to solve this question to know how many investments influence feelings; ask anyone who has sweaty palms while wondering whether to buy or sell.

Let’s take a look at some examples of how business psychology is affected by feelings.

Hope, fear and uncertainty

In a famous experiment, researchers distributed lottery tickets to a group of office workers. Before it was revealed that the tickets were winners or losers, the researchers offered each participant an offer: they could exchange their ticket for another and, if they agreed, they would receive an additional payment.

While their chances of winning will remain the same, less than half of the participants agreed to do so. Because?

Participants clung to the hope that their lottery ticket would really be the winner. And if they separated, they risk losing a fortune.

It’s silly enough, but today’s investors often do something similar. Fear of losing and the hope of big gains can give us a sense of ownership over a particular action and a sense of control in the face of uncertainty.

man looking at actions

For in spite

Imagine you have an action that doesn’t work well. It turns out you made a bad investment, but you are reluctant to sell your shares because that would reveal that you made a bad judgment. After all, to sell shares you would now have to admit the mistake and report a loss, and who wants to do that?

Reducing losses can be a blow to the ego, but it can help prevent more catastrophic losses than you might experience if you decide to “get off the boat.”

If you are faced with this situation, learn to see grief as a learning experience that can help you make better decisions in the future.

Aversion to loss

Loss aversion is closely related to fear of grief. Imagine, once again, keeping yourself in insufficient stock. Why don’t you sell it?

Loss aversion refers to the fear you might experience that stocks might rebound quickly; if you did, you would lose those profits by selling too soon.

While this may be possible, the final decision should be based on careful research into the company’s history and current financial information, not just the hope of a speedy return to profitability.

For missing

Fear can influence your choices in another way: the fear of getting lost or, ultimately, “FOMO”. We’ve all heard the stories of companies that start small and then make a meteoric rise.

Amazon, for example, opened for just $ 18 per share in 1997. If you had then invested $ 1,000 in shares of Amazon, you would be insured today at more than $ 1.3 million.

These overnight success stories raise hopes that you too can enter the ground floor. There is nothing wrong, of course, and your existing portfolio can be easily increased with some of these investments.

But your financial FOMO could easily tempt you to invest too much in a startup that seems like a “safe bet.”

It is seldom advisable to invest in individual stocks, and while we remember the success stories of Apple and Amazon, investors are inclined to forget about the failures of companies like Pets.com or GeoCities.

Excessive reactions based on greed and fear

Newer investors can easily be impressed by rapid market fluctuations. For example, if an action suddenly increases, it can build confidence that it will continue in that direction. Greed drives you to invest in this company, hoping to overcome the wave of its growing success. Conversely, you may notice that one of the shares in your portfolio falls unexpectedly. Fear can force you to sell these shares to mitigate your losses.

At the risk of sounding like a record-breaking, these two reactions can be addressed with careful planning and research.

Of course, in some cases, your “gut” may be right, and recent stock performance is part of a larger trend that requires you to act. But in many other cases, the fluctuations of a volatile market are cyclical and, by investing in the long run, the maximum return on their investments can be obtained.

Psychology of stock trading: learning to be a “satisfactory”

Stock market psychology is not too complex. Notice how many previous examples revolve around the fear or hope of big returns. But for others, the sheer perspective of selecting actions can be an exercise in anxiety.

Remember the previous example of Derek Thompson? Thompson noted that some people fall into the category of “maximizers,” trying to make the right decision.

Maximizers are seldom happy with their decisions, they always wonder about the path that has not been taken. Investors may also be to blame, striving so hard to maximize their decisions that they are dissatisfied with their investments and spending their days wondering “what if?”

Thompson suggests that there is another type of consumer: the “satisfied”. This is not a typo; Thompson is inventing a word that combines the words “satisfy” and “enough.”

Good investors are “satisfactory.” They do their due diligence, but are also willing to make a firm decision about their investments.

That’s not to say you can’t make adjustments along the way, but if you take that approach, you can avoid many of the stock trading psychology issues we highlighted earlier and learn how to be a wiser and happier investor.

stock chart

Invest wisely with Gorilla Trades

Hopefully, you have gained some insight into this overview of stock market psychology.

Many of the challenges associated with trade psychology can be overcome with the right research tools. Gorilla Trades members have exclusive access to the best tools in the industry, which can be used to optimize portfolios and become a smart investor.

Sign up today and take advantage of our free 30-day trial. We are confident that with our content and resources, you can become the type of investor you have always wanted to be.

Sometimes we include links to online retail stores. If you click on one and make a purchase we may receive a small commission.

Source link

Leave a Reply