Do you understand about stock market? It ain’t easy to understand investor behavior in stock market.
Psychological factors can actually explain why different investors behave in different ways which affect their investment decisions. Investors might actually overreact towards some information that they gained and under react towards others. One of the most common investor behaviors is overconfidence in their judgment towards the market. This actually happens when they actually underestimate the risk of the investment. The major mistake of all is when they are overconfidence towards the market; they tend to trade too much which will lead them to high transaction costs. The transaction costs might even exceed the returns that they gained.
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The second behavior is the investor tends to have biased self- attribution which means that they will take all the credit for the returns that they received and they will blame others for their losses that they encountered. This kind of investors will usually support the information that favor their beliefs and they will underestimate or not considering the information that are against them. They usually see the failure to get the returns as the result of the factors that are beyond their control.
The third behavior is known as loss aversion. This behavior often happens to the investors that dislikes the losses much more than the gains. For example, when a person loss $200, the loss that he experience will have a bigger impact on him compare with when he is gaining $200. The investor will usually hang on to the losing stock hoping the price of the stock will bounce back. They will sell the gaining stock rather than the losing stock.
The fourth behavior will be representativeness. The investor will usually make strong conclusions from a very small sample. This means that they actually ignore or underestimate the effects of random chance. One of the examples is when a stock broker helps the investors to gain from the market for consecutive three months, the investor will assume that the stock broker will maintain his performance and continue to help him to earn the returns. But actually the investor overlooks a few matters in this case. Firstly, the investment period is only three months which is a very short time period. Secondly, the results of the stock broker might just be driven by random chance. The investor should analyze the investment results for a longer time period before making the judgment that they choose the right stock broker and they are investing at the right investment.
Another behavior that most investor might have is the belief perseverance. This actually means that the investor will just simply ignore the information that is against their existing belief. They will even avoiding themselves from finding any new information because they afraid that the new information is against their initial opinion. Once the investor has decided that they make the right choice, they will believe it even though there is evidence proving that their choice is wrong.
Basically, these are the few of the investor behaviors that explain their actions when dealing with the investment. Some investors might posses one of the behaviors but some of them might posses few of these behaviors at one time. Understand these behaviors will help the investors to react in the market efficiently.