The Importance of Psychology in Investing
Have you already read many investing books, enrolled in Mutual Funds seminar frequently, already bought investment product based on influencer’s recommendation, but you still wondering how come your investment portfolio is still not growing? You are curious, aren’t you? So, let’s try to find out the reason in this article.
The Big Role of Psychology in Investing
Moduers, when investing, we are not only talking about strategy but also need to learn investing psychology. According to Dr. Van K. Tharp, a professional psychologist and trader coach, to be successful in investing requires 60% emotional mastery (psychology), 30% money management, and 10% trading strategy. So it means human psychology plays a big role in successful investing.
Human’s Emotional Brain and Perceptions
Basically, in the human’s brain, there is a part called the limbic system or “emotional brain,” which often forms the following perceptions:
1. Believing in something that many people believe.
2. Making decisions based on minimal data and family or friends’ recommendations.
3. Delaying your investment decisions because you think every little additional information can make your investment decisions better (information bias).
4. Delaying on taking profits and refuse to cut losses until your losses become even greater.
5. Avoiding losses and seeking profit.
Whether you realize it or not, those perceptions result from fear (of loss) and greed (money).
For example, since you want to get rich quickly (greed), you entrust your money to a financial institution that many people also trust to generate high investment returns in a short time and without risks. Besides that, you also do not inquire for further information about the financial institution because your friends or family also recommended it. So unintentionally, you have entrusted your money to a fraudulent, illegal institution. So instead of getting profits, you end up losing your money because of your greed and ignorance.
Losses in investing can also occur when you are (excessively) afraid of failures. For example, it can be the loss of opportunities to generate profits since you are so scared to start your investment or the loss caused by delaying your cut loss decision before it becomes a bigger loss.
For instance, you invested your wedding fund for the next ten years in stocks. As time goes by and as you learn more, you realize that the stock you invest in has not performed well (while the others are doing fine), so your investment value continues to decrease. Knowing that fact, instead of redeeming or switch your investment to another product or stock quickly, you choose to keep it with the hope the investment value will increase, which is unlikely to happen.
Investing Psychological Tips
Perceptions of psychological biases caused by the human’s emotional brain are normal, so you don’t need to be afraid to face them. However, you need to be aware that perceptions of psychological biases exist and can be controlled to make rational investment decisions. How?
1. Understand that investing is not a way to get rich instantly, so there is no need to be greedy.
2. Recognize that investing is not that dangerous as long as you know the investment instrument and its risks.
Risk comes from not knowing what you’re doing. – Warren Buffet
3. Learn and always question every piece of information or recommendations you receive from anywhere.
4. When you want to make a decision, make sure you are not overwhelmed by emotions, whether happiness, sadness, anger, etc. Keep in mind to always make decisions based on facts and data using your logic.
Moduers, as long as you invest, have you ever experienced a psychological bias in investing?