Behavioral Finance

Investing is 25% IQ and 75% temperament.

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We will discuss psychology traits one by one. After all we need to know the biases that exist within us else it will be way too difficult to win in the long run. Without being aware of the biases we tend to commit repeated mistakes.

• Herd Mentality: As human we follow the crowd though it may be wrong 90% of the time. Walking alone is difficult especially when you are right. W. Somerset Maugham, the great novelist, had put that exactly in words,“If 50 million people say something foolish, it is still foolish.”
• Framing Trap: We assume eating 90% fat free food is healthy. Let’s turn it around, how about eating 10% non fat free food. Is it really healthy? The media houses and institutional investors were present some scenarios in such a way that you will be lured to invest. Thinking how such a big company call fall. Hertz, the world largest rental car company recently filed for bankruptcy.
• Spending Trap: We love to spend the currency. May it be buying some clothes or buying some clothes. It is hard to hold on to cash. Specially when you have a mountain of money. Berkshire Hathaway has cash reserve of $128 billion. You don’t have to buy just because something is cheap. You have to make sure whatever you are buying today will be expensive some day in 5 to 10 years down the line. Else you are a buying a deteriorating asset class.
• Overconfidence: Which is the largest officially Hindu country in the world? India? Sure? Confident? Overconfident!!! Nepal is the only officially Hindu country in the world. Look to negate your thoughts and come up with counterarguments.

As per research, “The pain of losing is twice as much as joy of gaining.” Play hard play wisely. Its just another game 🙂

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