Psychology in Investing
Blog Post #2
There are many different components of finance and one of those integral parts is investments. Investing is when someone puts their own money in stocks, bonds, and real estate for future profit. It is an important part of finance because many people use investing to try and build their wealth while also helping the economy grow from the increased money in the business sector. What I wanted to look into with this blog post is the psychology involved in making investments. Investing smartly in a company involves analyzing their numbers in detail and making a decision on if putting the money in is worth it, knowing it may be a heavy risk and you could end up losing hard earned money in the process. There are many different strategies for investing, some of them include fundamental analysis, top-down or bottom-up investing, technical analysis, and contrarian analysis. (Weil)
What is interesting about all of these strategies is that they all work, but people still continuously make errors and end up costing themselves a lot of money in the process. I read in article related to this problem called “Avoid These Common Investing Psychology Traps” In this article, they went through common errors that people make while investing, and they consider all of these mistakes “minds traps”. One example of these is called “anchoring” which is when someone over relies on what they originally think works. It’s essentially being too confident in certain companies from preconceptions, and that results in not keeping an open mind when investing. Another investing mistake that has a psychological basis is called “sunk costs” this is when people try to protect their previous choices, it is hard to accept the mistake, and people end up sticking with the stock as it continuously sinks, instead of getting out and investing in something better. The last ones that I found really interesting were the relativity and superiority traps. The relativity trap is focused around the fact that our minds are making comparisons all the time, this happens in investments when people constantly compare stock choices of others and end up making regrettable decisions. The superiority trap is something that can lead to the downfall of many, it happens when an investor thinks that they are smarter than everybody else, they think that they can beat all the systems and professionals, this ends up costing people a lot of money when they make choices that are supposed to outsmart everybody and end up picking the wrong stocks. (Bloch)
When I read all of these different common mistakes, I realized how relevant they are and I had just no realized how much of a role natural psychology plays in finance. It became clear to me that it is important to be knowledgeable about strategy, analytics, and decision making in this field, but no matter what, psychology has a role in this too and you have to constantly check yourself and be smart about decisions that are made while investing.
After reading this article, it makes me think that there is even more psychology in finance that hasn’t been discovered. I believe that psychology effects us in ways we don't know yet, and I wonder where we can make improvements in the financial feed relative to psychology. Before this article, I knew about psychology and the basics of it, but it came apparent to me after reading that it extremely important because it can help us learn from past mistakes and make improvements for the future. I can also understand even more that understanding psychology will help with dealing with clients. Knowing psychology can help better understand clients’ attitude and style, which will make for more productive meetings and decision-making.
Grant Williams
Works Cited
Bloch, Brian. “Avoid These Common Investing Psychology Traps.” Investopedia, 29 July 2016,
psychology-traps.asp.
“CBT Clinical Psychology Centre.” CBT Clinical Psychology, cbtcentre.com.au/. (Image Credit)
Weil, Dan. “6 Common Investment Strategies of Fund Managers.” Bankrate, 1 Oct. 2014,
www.bankrate.com/investing/6-common-investment-strategies-of-fund-managers/.
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