Behavioural Finance & Investment Psychology

By M.Farouk Radwan, MSc.

Don’t Forget that You Are Dealing with Humans

One of the biggest mistakes people make when investing or trading, is forgetting that they are dealing with humans.

While investing people may feel afraid, anxious, over-confident or greedy.

Such emotions will certainly affect a person's investment decision if he lacks self discipline. Since most investors don’t have solid self-discipline the market is affected by psychological factors just as it’s affected by fundamentals and news.

Where Does Investment or Trading Psychology Fit in the Investment Process?

If you think investment involves the single step of researching a stock before you buy it then you are wrong. Successful investment requires that the investor becomes aware of all the factors that affect the price of the stock he intends to buy.

Those factors include researching the fundamentals, staying up to date with news, looking at the historical price charts and predicting how the market will react to future events.

Here is where investment psychology comes to play: the market may overreact or under react to an event and so open the door to a good opportunity for either exiting safely or for taking a new position. Just take a look at the following examples to see how psychology of investors can affect the market:

  • Fear: Fear is the strongest psychological factor that influences the market.
  • Attachment: Falling in love with a stock !! Some people fall in love with a certain stock because of the profits they once made out of it. They stick to it forever forgetting that change is the only constant
  • Greed: When someone starts to feel greedy he may either buy at a high price or buy a large amount of the same share without proper calculations.
  • Optimism: When people become optimistic they usually drive the market higher without any logical reasons. This results in either a market correction or even a market crash
  • Herd behavior: If you think that you know less than your peers then you might act like them without thinking (see the herd behaviour).

Investment Psychology and Maximizing Your Returns

Knowing about the psychology of investing will help you in avoiding emotionally driven decisions.

You could survive without knowing about investment psychology but another investor who knows about it will definitely make more money than you. Investment is a game of knowledge, the more you know the more money you will make.

Farouk is not only holding several degrees in psychology but he is also an MBA holder, a stock market investor and an entrepreneur. The information you are reading now can dramatically increase your chance of increasing your wealth and becoming reach. If you have any doubts regarding these statements then read what other visitors say about book How I did it was written by Farouk and it explains how he managed to make a website that generates thousands of dollars/month in less than 2 years without paying a penny.

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