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Fear & Euphoria

  
  Education
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fear-euphoria

It is inordinate “fear” and “euphoria” that prevent us from achieving our investment goals. And, the impact of these excessive emotions can be seen across the spectrum of traders.

  • The beginner who won’t put on a trade until he is certain the next trade will be a winner.
  • The trader who “knows” what the market will do and as a result refuses to exit a losing position.
  • The same trader who ignores market information that is contradictory to his position.
  • The same trader who becomes paralysed with fear – “Dear God, just let me break even! I promise I won’t do it again!”
  • The student who refuses to send in work because he doesn’t want to be told that his hours of work are “wrong”
  • The trader who after a series of wins feels “he’s made it!” …and becomes reckless.

Trading Madness

  
  Education
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Psychological BiasEffect on Investment BehaviorConsequence
OverconfidenceTrade too much.  Take too much risk and fail to diversifyPay too much in commissions and taxes.  Susceptible to big losses
AttachmentBecome emotionally attached to a security and see it through rose-colored glassesSusceptible to big losses
EndowmentWant to keep the securities receivedNot achieving a match between your investment goals and your investments
Status QuoHold back on changing your portfolioFailure to adjust asset allocation and begin contributing to retirement plan
Seeking PrideSell winners too soonLower return and higher taxes
Avoiding RegretHold losers too longLower return and higher taxes
House MoneyTake too much risk after winningSusceptible to big losses
Snake BitTake too little risk after losingLose chance for higher return in the long term
Get EvenTake too much risk trying to get break evenSusceptible to big losses
Social ValidationFeel that it must be good if others are investing in the securityParticipate in price bubble which ultimately causes you to buy high and sell low
Mental AccountingFail to diversifyNot receiving the highest return possible for the level of risk taken
Cognitive DissonanceIgnore information that conflicts with prior beliefs and decisionsReduces your ability to evaluate and monitor your investment choices
RepresentativenessThink things that seem similar must be alike.  So a good company must be a good investmentPurchase overpriced stocks
FamiliarityThink companies that you know seem better and saferFailure to diversify and put too much faith in the company in which you work
   
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