Curious
investor
behaviour
Do I do that?
Our psychological conditioning hinders
successful interaction with the stock market.
The mind tends to use short cuts in all
aspects of the collection, weighting and
interpretation of “facts”.
By being wary of our instinctive behaviour,
we are more likely to avoid common pitfalls.
KERR NEILSON
Framing:
Since we feel losses more acutely than gains,
people tend to seek positively framed information.
In a 1984 study, physicians were presented with
a hypothetical case of an epidemic that was
expected to kill 600 people. Two programs to
combat the disease were proposed: program A
would result in 200 people saved, whereas under
program B two-thirds of the 600 people would
die. 72% of respondents chose program A, even
though the results were identical.
How do you frame your decisions – do you take
information at face value, or do you question
how it is presented?
Anchoring:
Faced with uncertainty, investors will
grasp at any fixed point of reference
when forming opinions.
In a classic experiment, behavioural
psychologists Kahneman and Tversky asked
two groups to guess the proportion of African
nations that make up the UN. The first group
was asked whether the answer was higher
or lower than 10%, while the second group
was asked whether it was higher or lower
than 65%. The median response of the first
group was 25% and the second group 45%!
Can you imagine the perils of anchoring
investment decisions on completely
irrelevant information?
Loss aversion:
According to empirical evidence, the pain
of losing $100 is felt more than twice as
much as the pleasure of gaining the same
amount (Kahneman and Tversky, 1992).
Sadly, this irrational approach is evident
in the stockmarket. Many investors keep
hanging on to losing stocks in the hope
that, some day, somehow, they will bounce
back. Such is the distaste for loss that it
causes a mental freeze which renders
people incapable of sound judgement.
Loss aversion is a common condition.
Think about it – facing a loss, do you
sometimes freeze and refuse to
acknowledge reality?