Table of Contents
- Anchoring trap:
- Superiority trap
- Relativity trap
- Sunk cost trap
- Irrational Exuberance trap
- Confirmation trap
- Blindness trap
- Pseudo-certainty trap
Whatever we do, it’s influenced by some type of psychological behavior or prenotion that we have created of it in our mind. Even when it comes to investment, psychology plays an important role in estimating the factors important for us to choose the right investment. Therefore, an investor must be aware of not falling prey to the following psychological behavior while making an investment:
This is the most fundamental psychological behavior displayed by an investor. That is to act on something that has been perceived by him in his head. For example, while looking for purchasing a share of a company, the first thing that we do is look at how successful the company is. If it is, then we have this in our heads that a successful company ought to do well in the stock market. However, this might not always be the case. So, expand your horizon of thinking and also be ready to absorb new information so that this psychological trap doesn’t end up making losses for you.
A smart investor knows that he cannot know everything about the market. However, if an investor has been making better gains all by himself, he might think that he is better than the rest in this business and end up making rash decisions when it’s important to think calmly as he thinks that he knows better than the rest. Never ever think that you know it all. There are new things to learn about the markets every day.
You must have heard of the saying that listen to others but only do what you feel is right for you. This applies for investments too. Every individual is different and has experienced things differently which distinguishes them from one another. Therefore, never let an example of anyone in your relations leads you to believe into something which might not hold true for you. Make investment from your own view point and not others.
Sunk cost trap
This is another dangerous trap to fall prey to. One might make an investment which later on proves to be not that much worth but since the acceptance of making the wrong choice hasn’t come yet, the person might hold onto it and wait for the profits to come which may never arrive. Understand that you are human and can make bad decisions too. So, in case your investment is doing badly, sell it off and move to another one.
Irrational Exuberance trap
We often end up comparing our past experiences to our present and think that we know exactly what’s going to happen. But the actual thing is that we don’t. The market situation is always unpredictable and so never keep it in your head that what happened in the past, will have the same solution to what is going to happen in the present. Investing is all about the right timing and has no relation to its past or present. So, don’t be too overconfident.
It’s quite similar to that of sunk cost trap just you have a buddy in your bad times along with you. What I meant was that even though your investment is doing bad, you ask another investor, who himself has committed the same mistake that it’s better to wait for the profits to come i.e., confirming with him that you are making the right choice. This is a trap. Acceptance is most important when an investor starts making losses or else he will only lose more in the future to come.
Never be blind to what is standing right in front of you. This is just as worse as the confirmation trap. An investor might see that he is going to make losses out of the investment, still, turn a blind eye to it, and leave it to deal when the actual day arrives. Losses should never be ignored. Rather, face it and see if that problem is going to persist. If yes, then exit the investment before you doom all your money due to it.
An investor relaxes when there’s no such risk involved with his investment that could hamper his profits. However, the moment he starts making a bit of loss, thinking that more risk will help him in earning better profits, he ends up chasing risk which often doesn’t end well. This mentality of having it all back by taking as much risk as possible only works when you can back it up or are able to bear the losses. But if you are already losing, it’s foolish to fight a lost battle.
Before entering the investment business, keep this in mind: Uncertainty is the only certain thing that exists in the financial market. If you have this in your mind then you won’t make the psychological mistakes as often as people tend to and end up losing more than what they have earned. So, always beware!