6 Behavioural Finance Traits That Affect Stock Market Investing In India
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- Updated 05 Apr 2023
Stock markets are based on investor sentiments. These sentiments or emotions often display a behavioural pattern. Renowned behavioural economist, Richard Thaler says that people have a strong tendency to fall into behavioural patterns while making decisions . This also applies to their investment decisions.
Here are 6 behavioural patterns, or traits that affect the investment decisions of investors in India:
1. Ambiguity Aversion:
This is the tendency to choose the known option over the lesser-known ones. Let’s relate it with stock investing. What happens during a market plunge? The midcaps and the small caps suffer greater damage than the blue-chip large caps. This is because investors are comparatively more uncertain about the smaller companies. This also happens while making stock buying decisions. Investors tend to prefer large caps more than mid/small caps. You can avoid it by doing deeper research about midcaps and small caps. Click here to read more about midcap stock investing.
2. Confirmation Bias:
One important aspect of investing in stocks is tracking the markets. We track markets by observing market trends, reading news, and following expert opinions on financial news channels. While accessing these mediums, investors often avoid useful information that might not coincide with their investment expectations. This leads to irrational investment decisions. You can cope up with confirmation bias by analyzing every market information you come across.
3. Status Quo Bias:
Does the idea of reviewing your portfolio scare you? If yes, your investments are surely suffering from your status quo bias. To avoid this you can reach about different investment options, and take measured investment steps. Click here to read more about investment biases.
4. Herd Mentality:
You might have heard stories about people investing in stocks, either absolutely benefitting or losing all their money. Whom should you consider, the losers or the gainers? You should consider none of these stories if you wish to make the right investment decision. The volatility of the stock markets is often the result of herd mentality. You can avoid succumbing to herd mentality by studying stocks and staying invested for long.
5. Self-Herding:
Renowned behavioural psychologist, Dan Ariely coined this term. When you base your future investment decision on your past decisions, you are self-herding. Suppose, last time when markets were showing a downward trend, you sold your stocks and reduced your losses. This decision might not be the best solution for similar market trends. You can avoid this by analyzing the reason behind the market trend.
6. Irrational Exuberance:
You might have heard about the financial bubble of the early 2000s, or the very famous “Dot Com Bubble” of 1990s. These asset bubbles were the result of market overvaluation. Market overvaluation might occur due to investor over-optimism. Noble Prize-winning economist, Robert Shiller in his research suggested that both, tech and housing bubbles were the result of irrational exuberance . You can avoid it by having a diversified portfolio.
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