Investment decision-making is objective as well as the subjective perspective of an investor. Risk and uncertainty are subjective which involve psychological and emotional factors that influence investment decision making. Perceptions, expected returns, costs, planning, on the other side, are with how we are in decision making, our behavior to which we often land up and look at ourselves, and these behavioral patterns more closely.
Personal Biases: People have a favorite in life and with investments too; it may be an equity or a bank fixed deposit or an insurance plan, into which they will be investing most of the time. While we feel comfortable with one option, we may ignore others that may be better, invest in very few products, be doubtful about new investments and unconsciously find reasons to reject new ideas or thoughts. We needn’t be venturesome with our investments but should always be open to new ideas and approaches in the investment space.
Herd Behavior: Another typical behavior is herd mentality. We don't want to stand out in a crowd and do things that most of our family members, friends haven’t done or are not comfortable with. Avoid such an approach while making investment decisions. We have to evaluate our decisions independent of what others are doing or saying.
Impatience: With changing time and improved technology, we are spending less time than earlier on doing things. We became more result-oriented, impatient with many aspects of equity investments, and not fixed deposits. Most of the time impatience leads to compulsive decisions, which may not be useful. We always have to remember that equities are for the longer horizon of time.
To Please others or self: Sometimes people will be aware that the investment is not suitable for them, despite that they will decide to go with it. It may be for pleasing others or doing a favor for another person. Maybe it is difficult to say no to someone or due to a personal relationship or extend financial assistance or due to own ego or do simple charity. We will be trying to please ourselves in our subconscious mind, and we will feel good about it. We must learn to say no to such investments unless we are not sure about them, irrespective of the person behind them.
Not asking questions: We rely on and trust our adviser's relationship, who will be helping us and hesitate to ask questions to him. He acts in our interest. But it would be nice to ask relevant questions like expected returns, ideal time horizon, investment costs, liquidity options and lock-in period, past performance, risks involved, tax incidences, other similar products, and so on before making the final investment decision. With this, the adviser will come to us with good preparation and bring in better options.
Postponement and laziness: Postponement by delaying paperwork, or pushing investments to some other time, is another expected behavior that impacts our financial decisions. Due to our laziness, we avoid evaluating financial goals, our needs, available investment options, failing to conduct thorough research, etc., which may miss out on good investment opportunities and harm us over a period.
The dominance of emotions: Most common emotions like greed, fear, and hope impact our investment decisions. Willingness to buy when the prices have already inched north is, keep on holding with the investment even when the prices have already gone up, expecting returns based on the past performance are due to greed.
Due to fear, we avoid buying good investment opportunities when markets are not doing well by thinking that it will further fall and believe that the market is not yet bottomed out. Instead of buying at such time, we lose money and good opportunities by selling and winding up our investments. Repeatedly we keep holding our favorite investments for a longer duration by hoping that they will touch the past highs which they might have earlier.
By keeping our emotions aside, we have to do an objective and rational analysis before investing. If we are aware of our emotions and behavior, we can help ourselves avoid them and make wrong decisions. The more we know are aware of ourselves, the better investment decisions we can take. With that, we can evolve from ordinary investors to intelligent and smart investors.
By Team Wealth ATM
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