How to Overcome Emotions That Hinder Investment?
Investing can be hindered by three emotions: fear, greed, and regret. These emotions can make it difficult for investors to make rational decisions. However, if you understand and manage these emotions, you can make better investment decisions.
1. Fear
Fear makes investors overreact to the volatility of the stock market. When the stock market falls, fear drives investors to sell hastily to avoid losses. However, by managing fear, you can endure temporary market declines and achieve greater long-term gains.
2. Greed
Greed is an emotion that is likely to appear when the stock market rises. Greed leads investors to excessively invest in high-risk stocks. However, if greed is not controlled, it can result in significant losses. The way to manage greed is to clearly define your investment goals and follow your plan without being swayed by emotions.
3. Regret
Regret stems from looking back at past investment decisions and thinking, ‘Why didn’t I sell then?’ or ‘Why didn’t I buy then?’ Such rumination is often unproductive. However, analyzing past mistakes through regret and planning better future decisions can be helpful.
Four Psychological Factors You Need to Know for Investment
1. Loss Aversion
Loss aversion in behavioral economics refers to our tendency to overreact to losses. The pain from losses is twice as intense as the pleasure from gains. To overcome this, it’s important to maintain balance and not be swayed by exaggerated media reports.
2. Rumination
Rumination refers to constantly thinking about past wrong decisions. While it is usually unproductive, reflecting on past decisions and planning specific future actions can be beneficial. For example, reviewing and updating an underperforming investment portfolio.
3. Breakeven Effect
The breakeven effect is the tendency to take greater risks to recover losses. Investors don’t need to raise risk levels to recover losses. As the market recovers, so will the losses naturally.
4. Brother-in-law Effect
There are always people around who claim to profit in any market. However, there’s no need to be swayed by their stories. Research suggests you are likely better off than those boastful individuals. Just as with exaggerated media, it’s best to avoid such stories.
Conclusion
Ultimately, the key points to remember for successful investment are as follows. Make sure to keep these in mind!
- Investment emotions are something we all feel. Understanding and managing them is the first step to successful investing.
- Fear, greed, and regret are all factors that hinder investment, but they can be overcome.
- Learn to recognize and overcome loss aversion, rumination, the breakeven effect, and the brother-in-law effect.