Investing is not only a science, involving numeric analysis, but also an art, involving one's behavior, emotions and attitude. Benjamin Graham, the father of value investing, rightly said: “the investor's chief problem - even his worst enemy -
is likely to be himself.” Investor's decision-making process always starts with logic and reason, but often deviates from it due to behavioral bias, which could lead to mistakes. This article elaborates on the influence of behavior on investing.
What is Investment Behavior?
Different emotions follow the investment cycle as mapped in chart 1. In any given situation, investors think and act in a certain way based on their personality traits, emotional state and psychological make-up. These factors complicate the investment
decision-making process and defy logical reasoning.
- Anchoring Bias: Tendency to take decisions from an initial reference point
- Availability Bias: Tendency to give more importance to the most recent events
- Confirmation Bias: Tendency to favor only that which confirms one’s belief
- Disposition Effect: Tendency to sell winners early & holding losers for long
- Herd Mentality: Tendency of an investor to mimic the actions of a larger group
Human emotions play a very important role in investing decision making. Understanding behavior bias will definitely help investor make more rational decisions in his/ her investment journey.
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