Investing is not only a financial endeavor, but a chiefly psychological one as well. Investing your hard earned money is a decision that typically does not come lightly, and throughout the investing process different emotions or psychological states of being might come bubbling up from the deep. Understanding your own psychology, and the techniques that help to mitigate emotional over-processing can potentially help to increase your chances of success on the market.
Human beings are emotional creatures by our nature, and we are full of emotions like love, generosity and warmth, but also the lower emotions like green, envy and anxiety. Aside from those basic emotions, we also have more complex emotional states and biases that can have a strong influence on our investing methodology and practices. One of the main psychological factors that can have an influence on our investing decisions is cognitive bias. Cognitive bias refers to the subconscious mental shortcuts that people use to make decisions. These biases can lead to investors making irrational or unwise financial decisions that are not based on fact or objective reality.
The Most Common Types of Biases
Anchoring bias: This refers to the tendency to rely too heavily on the first piece of information that we encounter, even if it is not relevant to the decision at hand. In trading, an investor may be anchored to a particular price point and refuse to sell a stock even if it no longer makes sense to hold onto it.
Confirmation bias: This is the tendency to seek out information that supports our existing beliefs and to ignore or downplay information that contradicts them. In trading, an investor may only read news articles that confirm their beliefs about a particular stock, rather than considering a variety of viewpoints.
Overconfidence bias: This is the belief that we are more skilled or knowledgeable than we actually are, which can lead us to take on more risk than is appropriate. In trading, an overconfident investor may invest a large portion of their portfolio in a single stock, believing that they have unique insights that other investors do not.
Loss aversion bias: This is the tendency to prefer avoiding losses to achieving gains, which can lead us to hold onto losing investments for too long. In trading, an investor may hold onto a stock that has lost value, hoping that it will eventually recover, even if it is clear that the stock is unlikely to do so.
Understanding that on some level, we all operate under the influence of these biases — some more than others. Knowing this, and knowing that there are ways to mitigate these risks can help tremendously. 0 Percent has developed the Algorithmic Trading Accelerator (ATA), which utilizes artificial intelligence powers algorithmic bots to help quantum leap your trading strategy. To get started trading today or to learn more about our Algorithmic Trading Accelerator, click here!
Emotions, as mentioned earlier, can also have a strong influence on our investing decisions. Fear and greed can cause investors to make impulsive decisions that are not based on a rational analysis of the facts. Anxiety can cause investors to miss golden opportunities. It is important to recognize and manage these emotions in order to make sound investing decisions.
One way to manage your emotions when investing is to develop a clear investment plan that outlines your goals, risk tolerance, and investment strategy. By following this plan, you can help to keep your emotions in check and avoid making impulsive decisions. It can also be helpful to seek the guidance of a financial professional who can provide objective advice and help you to stay on track.
The psychology of investing is complex and goes deep into our psyche. By understanding and managing the psychological factors that influence investing decisions, investors can make more informed and rational decisions and potentially achieve better outcomes.
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