Investing is an art and a science.
The "science" part is the fundamental and technical analysis, but gut feels and emotions also play a huge part in investing.
eg you watch Netflix, So you decide to buy Netflix shares....without even looking at figures.
The "science" part is the fundamental and technical analysis, but gut feels and emotions also play a huge part in investing.
eg you watch Netflix, So you decide to buy Netflix shares....without even looking at figures.
Emotional investing is driven and propelled by bias.
You may not realize you bought that investment because of cognitive bias.
So let explore those biases....
You may not realize you bought that investment because of cognitive bias.
So let explore those biases....
Anchoring: An Anchor bias is information eg price of a product which has no direct relevance to an investment decision but does affect financial decision making. In essence, a bit of information becomes “anchored” in our minds and thus automates our decision making.
An excellent example is when a stock valued at N50.00 falls in price to N20.00. An investor, having "anchored" the previous N50 share price in his mind, will determine that at N20 the stock price is “cheap” ie discounted and invest in that stock.
Lessons on anchoring? Do careful intrinsic evaluations. For the entrepreneur, Be careful when setting prices. If your “special” pepper-soup, is N2,000 per plate, that’s the anchor. Customers will be wary about paying above that prices for any other dish in your restaurant.
Loss Aversion Bias: is when an investor has an aversion to making or admitting they have made a loss on an investment.
The direct implication is investors hold onto a bad investment, because selling that investment will acknowledge to themselves, they made a mistake.
The direct implication is investors hold onto a bad investment, because selling that investment will acknowledge to themselves, they made a mistake.
For example, MMM, the failed ponzi scheme, attracted a lot of deposits. Some “investors” may have run the numbers and determined the scheme was unsustainable. Yet, they still did not exit the scheme.
Key Lesson on loss aversion bias: The way to avoid loss aversion is to have a clearly defined exit strategy. Be clear on what will trigger a sale from your portfolio. Also, do extensive research before investing.
