Learning About Investment Behavior

The title of the article may sound like a chapter from a psychology book. But hardly is it academic in nature. This time around, we would take a look at what goes on in our minds before we take any investment decision.Investment decision making is like a coin with two sides – one which is about about facts, figures, objectivity, planning & so on. This is the heads side of coin. The other side is about how we are, our emotions and our behavior. For most of us, our coins don't often land up as heads. Let us then see at ourselves and look at these behavioral patterns more closely.

Personal Business:
Everyone has a favorite. And the good thing about having favorites is that you tend to know more about them. In investments too we have our favorites and that it where we would be mostly investing. For some it may be equity, for some bank fixed deposits and for some, insurance plans. But the problem really starts when we tend to ignore other better options while feeling comfortable with our choice. Statistics show that a majority of the investors tend to invest only in one, two or at most three products for a particular purpose. Also we tend to be skeptical about new investments and unconsciously find reasons to reject the new ideas. As investors we should always be open for new ideas and investment avenues but not necessarily adventurous.

Herd Behavior:
Another behavior commonly observed is herd mentality. We often tend to follow others believing that what everyone is doing is right and thus going with them wouldn't harm us. This approach reaches an extreme when we know that something is not right but we still go through it believing that everybody is doing it so when something goes bad, you will not be alone. The sense of our loss becomes less hurting when we know that others have lost too. We also don't want to stand out in a crowd and do things which most of our friends, family members have not done or are not comfortable with. While making investment decisions, this approach or behavior is something we must avoid. If everyone is saying that 'x' is bad or 'y' is good, it needn't be so. Evaluate your decisions independent of what others are doing or saying.

Impatience:
With changing times and growing use of technology and other services, we are now spending less time for things that used to take hours before. The fast paced life has also made us more result oriented and impatient in many things, investments being one of them. However, within investments too, we tend to be more impatient and demanding out of few investment avenues, like equities, while being very easy with others, like say fixed deposits. Playing a good dad or bad dad to different investment avenues is not good. Often impatience leads us to make compulsive decisions, which may not be beneficial. Every asset class is suited for a particular time horizon and equities are for long term. So let us avoid checking our investment every now and think what the remaining money can do for us.

Pleasing others and self:
There are also a few among us who are good samaritans. Being good means that you take decisions knowing it may not be best suited to you, just to please or benefit that other person. It is not easy for you to say no. There may be may motives behind this like say relationship, financial assistance, ego or simply charity. But does acting on recommendations by persons, to whom you can't say no, make any real difference to anyone? In doing so, many a times, we also unconsciously are trying to please ourselves and feel good about making such investments. We must learn to say no to investments until we are not very sure about, irrespective of who is behind it.

Not asking questions:
There are also few among us who are not in the habit of asking questions. When any investment idea is proposed, we often just ask a few customary questions often beginning with “How is it?” Reasonably satisfied with replies, we rely on the trust and relationship of our adviser who is helping us. Surely, your adviser is acting in your interest, but wouldn't it be really a lot more worthwhile if we could ask all relevant questions before making investments? This would include questions on ideal time horizon, expected returns, risks involved, tax incidences, liquidity, operational matters, past performance, other comparative products, investment costs and so on. Make use of these questions and the next time your adviser will surely bring better options before you and also come well prepared. So next time any investment idea is thrown at you be ready to say “Tell me everything about it”.

Procrastination & laziness:
Another very common behaviour observed is that of procrastination. This impacts our financial decisions fairly regularly. Procrastination can be seen in every instance of delaying investment decisions, delaying paper work or pushing decisons to some other time. Our laziness too gets the better out of us. Often, it is because of laziness that we do avoid getting involved in proper research, study of our own needs, financial goals, investment options available and so on. Combine them and we get a deadly combination that can kill good opportunities and harm our financial well-being over time. You may not see any big impact at any point of time, but they are always there, eating away your few rupees every now and then.

Overriding emotions:
The last behavior but also the most pressing one is where we let our emotions get the better of us and impact our investment decisions. There are three emotions that we will talk about here – greed, fear & hope. Greed would be like buying when the prices have risen, looking at the past performance or the returns others have made or still holding on for more when the prices have already risen. Greed would also make us go on fishing trying to catch a big fish from a water we cannot see. The big fish or the next multi-bagger, hot tip, often does not turn up. At the end of the day, we waste more of our precious time and money trying to get one than from we benefited, even if we caught one. Fear is another big emotion to be beware of. It often makes us avoid good opportunities when markets are not doing good, for the fear of further falls. A sense of negativity prevails and we tend to believe worst is yet to come. We would also tend to sell and windup our investments in order to salvage whatever we can at preciously the time we should be acting in the opposite manner. Not only do we end up loosing money but we also end up loosing money that we could have made during these times. Any bad experience in past also makes us overly cautious and we blacklist the entire investment class for ever, often to our own loss. Hope is last of the big emotions that we pay to carry. Often it would make us keep holding in our long time, favorite investments hoping they will recover to the past highs. A sensible, objective analysis should be made each time any emotion overbears itself on our thinking. Emotions, after all, carry no value in the investment world.

Knowing and acknowledging the presence of these behavioral traits within ourselves would help us in avoiding decisions taken immaturely. The better we know ourselves, the better we can be objective in our decision making. Consciously keeping our emotions aside over time will see that our investment coins lands heads up more often than not. It is this process by which you graduate from a normal investor to a smart & shrewd investor.