Somewhere an article compared the skills of investing with skiing. It is interesting how the mastery of these two very different activities require similar and very counter-intuitive techniques. Mastery of skiing requires us to conquer our fears of falling. To go down a slope, we must lean down the mountain; and to turn, we must lean into it.
Similar is the case with investing. We are afraid of going against the public sentiment. When the world is enamored by an investment trend, it is difficult not to be a part of this trend. The thought of being left behind and not profiting is a strong motivator to join. This is our greed in play. Similarly, to hold onto something whose basic fundamentals is strong but is not in favor anymore creates fear. The fear of being the loser is an equally strong motivator to sell. And this combination leads to “Buy High, Sell Low” behavior. Thus, in investing as in skiing, we need to learn the counter-intuitive skills of overcoming our greed and fear.
Behavioral finance is a relatively new field that seeks to explain our actions against the backdrop of modern finance. It postulates that investors are not necessarily rational beings, or at least not where finances are concerned. It includes observable, systematic, and human departures from rationality into standard models of financial markets. And proves, investor behavior has its effects on the market prices & returns. This contradicts the belief that financial markets are efficient.
As per some of the findings, men trade 45% more than women and sacrifice an additional 0.94% of their potential return as a result. Another finding is that loss aversion causes investors to sell winners too soon and hold on to losers too long.
The above findings are just the tip of the work done in behavioral finance. Research has been done in numerous aspects of human behavior. One example is how people “anchor” themselves to a certain price while trading and their future actions get determined by this anchored price. If a stock is bought at price X, to buy the same stock above X gets more difficult. We keep waiting for the price to go down so that we can buy it again.
To read more about this interesting aspect of finance, search on “behavioral finance” and you will find wealth of information on the internet.
— Lavina Nagar
— Lavina is a financial planner and founder of Maya Advisors, Inc. She can be reached on 650.704.3074 or
Disclaimer: This article is for information-purposes only, and may not apply to your unique situation. Nothing in this should be interpreted to be a recommendation to anyone to purchase, sell or hold any security or product. It does not replace a lawyer, accountant, financial planner, or other professional advice.