The Psychology of Investing – Part One
Investing in stocks can be a rollercoaster, but the scariest loops and drops often aren’t caused by the market—they’re created by the emotional amusement park in our own heads. Despite all the books, podcasts, and seminars promising to make us master traders, the truth is, humans are wired to make investing mistakes. Let’s dive into some emotional biases that make us trip over our portfolios, with examples that might hit a little too close to home.
1. Fear and Greed: The Dynamic Duo of Disaster
- Fear of Missing Out (FOMO):
Imagine your neighbor bragging at the barbecue about how their tech stock has doubled in a week. Before you know it, you’re panic-buying at the market peak, just in time for it to crash. Congrats, you bought the sizzle and ignored the steak. - Fear of Loss:
On the flip side, there’s that time you sold your stock the moment it dipped a little—only to see it bounce back and soar two months later. You avoided the pain of holding, but now you’re stuck with the regret of missing out. - Greed:
Remember GameStop? Or crypto in late 2021? Enough said. Greed can feel like riding a rocket—until you realize you forgot a parachute.
2. Overconfidence: The “I Got This” Trap
Ever felt like a stock-picking genius after one good trade? Maybe you even started giving unsolicited advice to friends. Then reality hits—turns out your “killer instincts” were luck, and now your overtrading habit has your portfolio looking like Swiss cheese.
3. Herd Mentality: Everyone Else is Doing It, So Why Not Me?
When the crowd zigs, we often zig too—right into trouble. Case in point: remember the dot-com bubble or the housing crisis? Following the herd can feel safe but usually ends with a group therapy session for financial regret.
4. Anchoring Bias: Stuck in the Past
You bought a stock at $50, and now it’s $20. Instead of cutting your losses, you keep holding because “it’ll bounce back.” Meanwhile, your money is stuck in a loser when it could’ve been working for you elsewhere. Anchoring bias turns hope into a costly hobby.
5. Confirmation Bias: The Internet Said I’m Right!
When you’re convinced a stock is a winner, you scour forums for opinions that agree with you. Found five articles confirming your belief? Great! Ignored ten articles screaming “sell”? Also great—until it’s not. This bias makes us blind to red flags waving furiously in our faces.
6. Regret Aversion: Freeze or Fumble
Ever avoided selling a stock because you didn’t want to admit it was a mistake? Or hesitated to buy into a market dip because “what if it keeps dropping?” This fear of regret leaves you stuck on the sidelines, missing opportunities or clinging to losing positions.