Investor Behaviour
Why do investors behave as they do? Do investor behave unknowingly as they do or experience drives investor?
Investing is more than just analysing numbers and making decisions to buy and sell various assets and securities. Investing involves individual behaviour. Ignoring or failing to understand the investor behaviour can influence the portfolio performance. There are several biases because of which investor often ends up in losses or make mistakes repeatedly. Understanding investor behaviour can make investors aware of these biases and help them improve their portfolio performance and decision-making processes in selecting securities.
Mutual funds take advantage of investors by increasing advertising when past performance is high to attract new investors. Research evidence demonstrates that investors do not benefit because performance typically fails to persist in the future. But investors tend to invest in such mutual funds without doing proper analysis.
Investors often think the company they have invested will do well. Thinking they have more predictive knowledge than they actually have. Concentrating more on most recent news and neglecting past news and data. When there is any ambiguity investor expects high returns. What are all these biases? Feeling like you came through those situation? Let’s go in to little deeper understanding.

Overconfidence Bias — Investors overestimate their skills and abilities. Since investors think themselves as skilful they trade in very large volumes so ends up losses. They typically underestimate the risk and overestimate the returns. Generally most of the IPO’s fail but overconfidence investors think all IPO’s or good investments.
Anchoring Bias — if an investor invested in XYZ Company at $50 expecting the price to go up but suddenly stock price started come down and crosses $40 but investor still thinks that the stock will go up. They tend to remain invested even the stock is moving downward. It’s always suggested to have Stop loss to avoid huge losses. Since investors do not want to lose money they do not sell at lesser than the buy price but ultimately they incur huge losses.
Cognitive Dissonance — As name says it’s a mental discomfort of an investor. Let’s say an investor is thinking to purchase XYZ company stock which is trading at $50 and coming down to $48 investor is wanting to buy the stock at even lesser price and he thinks to buy at $45 but suddenly stock price starts moving upward and crosses $53 this creates mental discomfort to investor and he ends up buying the stock at $53. Often investors buys at high prices because of mental discomfort. Don’t forget the rule Buy low sell high.
Conservatism Bias — Investors react to the market news little slowly. May be because of indecisiveness. As they react slowly they sell their stock slowly so ends up in losses. Stocks are very liquid a small news can change the markers upside down.
Self-Attribution Bias — Typically investors want to hear what they want to hear for instance XYZ Company is going to announce its financial results next week if investor is thinking that the company would announce attractive number he would invest now. But if company will not come up with good numbers he will be in losses. The tendency of this kind of investor is attributing successes to personal skills and failures to factors beyond their control. Investors afflicted with self-attribution bias may become overconfident, which can lead to overtrading and underperformance.
Illusion of Control Bias — Investors sometimes overestimate themselves and put themselves in losses. They tend to think they can control beyond what actually they can control. They invest in very large volumes thinking they can control and creating a portfolio which is not well diversified. It is better to step back once and think from the global perspective and circumstances that you are in. it is good to track all the past transactions to avoid future losses.
Representative Bais — Labelling an investment as good or bad based on its recent performance. Buying stocks after prices have risen expecting those increases to continue and ignore stocks when their prices are falling thinking prices will continue to fall.
“Investors cannot avoid all biases but they can reduce their effects”
Happy Investing

