Blog

PSYCHOLOGICAL APPROACH TOWARDS INVESTMENT

Investment Psychology is all about the behavior of the investors, about what they believe, how they act and what they do. Here, discussion can also be made on ‘Behavior-Finance’, which is actually a theory of finance that attempts to explain the decisions of investors by viewing them as rational personnel, looking out to give a clear picture about the fluctuating nature of market-prices. Here, concepts and biases affect decision-making, playing a major role in the outcomes. Market prices are influenced by sentiments about a company in the market. If the investors are having positive sentiments in the market, prices in stock would be appreciated even if the company is not reporting good earnings.

Certain procedures should be prepared mentally, before investment – 1) Having a proper financial plan, 2) Saving should be given priority, 3) The power of compounding must be understood, 4) Should be comfortable in taking risk sometimes, 4) Diversification and asset-allocation should be understood, 5) Classic investment strategies must be studied, 5) Above average financial sense, 6) Low overconfidence level.

Investment personality analyses the factors that influences financial behaviour. It helps to outperform by building a portfolio that matches with risk profile and personality. The nature of market is quite uncertain. The way one invest in the market, may define one’s conscience and the traps where one can unconsciously fall into. Investment psychology uses insights from the field of psychology and is applied to the actions of individuals in trading as well as applications of other investments. It combines Psychology and Economics to explain why and how investors act and also analyze their collective behaviour, which can create impact on the market. Thus, with understanding ‘Investment Psychology’, one can identify the biases of investment psychology. It can also help to avoid those traps and make informed and conscious decisions.

Thus, the decisions regarding investment should be made cautiously using analysis, logic and rational thinking.  As humans, we should go through rational or logical thinking instead of being emotional.  Thus, investment can be considered an essential impact regarding personal finance but emotions can impact investment decisions and also hinder long-term financial success. Additional education and awareness about the impact of emotions on investment decisions can also help the investors to make better informed decisions. Thus, by adopting an overall sound investment strategies, actual investment goals can be achieved relatively, avoiding the pitfalls of emotional investment.