Behavioral Finance: Key Concepts – Herd mentality

We always think that we are rational enough and that we play the game according to the rule, but the simple fact is that as humans, we constantly allow our prejudices to influence our investment decisions. These prejudices that we are not aware of, unfortunately, can cause painful consequences.

In this article we look at some of the prejudices, investments and how these prejudices can be overcome.

Flock Psychology

Most people find comfort in general harmony and follow the crowd even if they must jump from the edge of a cliff. While investing, this herd of psychology can lead us to make inaccurate decisions without making a proper research and to get into a wrong wave of buying or selling. This situation is both risky and very costly.

How to overcome: Resist flock printing and be yourself. As an investor, identify who you are, your goals, your values, your strengths, your weaknesses. When you do this, you can only act in accordance with your own interests, and instead of watching the herd, you can make the right decisions for yourself.

Hopes for Compensation

Losing is more painful than winning. The loss is not just monetary; it is also emotional. In these cases we often think that we made a stupid mistake, we believe that we can compensate this error as soon as possible. However, in the case of continuity, the fear of losing, the avoidance of harm, and the overlapping hopes of overthrow could explode more expensive.

How to overcome: Start by accepting the risk of losing in the short term to win in the long run. Some investments make the expected return sooner or later, while others require a longer-term perspective, but even if you don’t have any concrete evidence, just blindly holding any investment because you have only hope will give you more losses.

If you are unable to remedy the losses and you cannot prevent them at all costs, you are condemning yourself to a really low-performing portfolio.

Future Prejudice

What is happening today has a greater impact in our decision-making process than in the past. When traders see several olur up olur days in a row, they tend to buy immediately, for example, in the belief that the market may go further, instead of waiting for a ”dip Yatırım.

How to overcome: Check out the market history. In the short term, the ups and downs are completely normal. And in the long run, there are a mix of bear market and bull market. Therefore, your investment strategy should include an expectation for both. Markets always enter these cycles. Keep in mind that ultimately you need to look at the long-term perspective.

Verification Deviation

After creating a positive opinion about an idea, we bypass all the other information that would contradict this view and believe this positive opinion easily. Because it feels good to think that our ideas are true; it may seem unnecessary to care for the views of the other party.

How to overcome: Look at the pros and cons of any investment opportunity to make a truly informed decision and determine whether it fits your long-term strategy.

Remember that every investment is based on a dispute. For example, one finds a stock in its own right; someone else says it is not appropriate. Therefore, you have to see the other side actively. If you do this, you will act as an intelligent, sophisticated, emotionally strong investor.

Leave a Reply