Home » Meaningful Minutes » 6 Behavioural Finance Traits That Affect Stock Market Investing In India

Meaningful Minutes

It will take you 3 minutes to get a comprehensive perspective on financial topics
2 related articles that add to your knowledge
One number fact that you should know
How it helps?
  • Zero maintenance charges
  • Zero fees for demat account opening
  • Volume based brokerage
Reach Us
Learn the art of Investing

Read More

    Help us improve Meaningful Minutes with 4 simple answers. Take survey

    • 6 Behavioural Finance Traits That Affect Stock Market Investing in India

      Publish date: July 01, 2019

      By: Sandhya Kannan, Head – Content

      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. Click here to know more about behavioural finance and stock markets.

      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. What can you do when markets are volatile? Click here to know the solution.

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. Read more about the effect of the crisis on markets.

    • When the ‘herds get spooked,’ this is what a stock market crash could look like   Read more

    • Avoid irrational exuberance   Read more

  • 72

    S&P BSE Smallcap index formed a bearish candle on the week ending June 14, 2019. As many as 72 smallcap stocks suffered the big carnage of 10-30% fall. However, the S&P BSE SENSEX only fell by 0.4%. To know more about candlestick trading, and its benefits in understanding emotional trends, click here.

Also read: