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What happens during a market crash - a peek into human behavior

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A glimpse into the various psychological biases that impact us during a bear market and how to work around them

Published in: Economy & Finance
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What happens during a market crash - a peek into human behavior

  1. 1. www.eightytwentyinvestor.comwww.eightytwentyinvestor.com
  2. 2. www.eightytwentyinvestor.comSource: Morgan Housel article
  3. 3. www.eightytwentyinvestor.com
  4. 4. www.eightytwentyinvestor.com
  5. 5. www.eightytwentyinvestor.com -7000 -2000 3000 8000 13000 18000 23000 28000 33000 38000 43000 -50 0 50 100 150 200 250 300 Equity MF Inflows vs Sensex 12MMA net inflows into Equity MF ('000 Cr) Sensex
  6. 6. www.eightytwentyinvestor.com
  7. 7. www.eightytwentyinvestor.comSource: https://multi-act.com/mutual-fund-investing-simple-but-not-easy/ *up to 31 March 2016
  8. 8. www.eightytwentyinvestor.com
  9. 9. www.eightytwentyinvestor.com
  10. 10. www.eightytwentyinvestor.com 1. Behavior in a bull market 2. Behavior in a bear market
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  12. 12. www.eightytwentyinvestor.com -70% -60% -50% -40% -30% -20% -10% 0% Apr-79 Apr-80 Apr-81 Apr-82 Apr-83 Apr-84 Apr-85 Apr-86 Apr-87 Apr-88 Apr-89 Apr-90 Apr-91 Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Apr-97 Apr-98 Apr-99 Apr-00 Apr-01 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Sensex - Drawdown
  13. 13. www.eightytwentyinvestor.comSource: Wealth Forum
  14. 14. www.eightytwentyinvestor.comSource: Wealth Forum
  15. 15. www.eightytwentyinvestor.com
  16. 16. www.eightytwentyinvestor.com
  17. 17. www.eightytwentyinvestor.com
  18. 18. www.eightytwentyinvestor.com The pain of losing is psychologically about twice as strong as the pleasure of making profit
  19. 19. www.eightytwentyinvestor.com
  20. 20. www.eightytwentyinvestor.com Understanding our lizard brain
  21. 21. www.eightytwentyinvestor.com The culprit in your brain Mr Amygdala!!
  22. 22. www.eightytwentyinvestor.com So what does it do? Freeze, fight or flight Brain’s early warning system
  23. 23. www.eightytwentyinvestor.com Financial losses are processed in the same area of the brain that responds to mortal danger! And it is literally true that we can relive our financial losses in our sleep.
  24. 24. www.eightytwentyinvestor.com
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  26. 26. www.eightytwentyinvestor.com Obsessive portfolio stalking..
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  30. 30. www.eightytwentyinvestor.com Enter Mr Asch and his experiments.. 3 out of 4 people ignored what they could see so evidently with their own eyes and answered incorrectly at least once!
  31. 31. www.eightytwentyinvestor.com
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  35. 35. www.eightytwentyinvestor.com Video
  36. 36. www.eightytwentyinvestor.com Eichmann said he was a “mere instrument” of leaders responsible for the killing of 6 million Jews in World War TwoHandwritten request for clemency by Adolf Eichmann, an architect of the Nazi Holocaust
  37. 37. www.eightytwentyinvestor.com https://www.youtube.com/watch?v=yr5cjyokVUs
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  44. 44. www.eightytwentyinvestor.com https://blogs.cfainstitute.org/investor/2012/08/10/silver-medal-or-bronze-understanding-pride-regret-and-counterfactual-thinking/ A team of researchers found that, while gold medalists are happiest about their accomplishments… Bronze medalists are consistently happier than silver medalists!!
  45. 45. www.eightytwentyinvestor.com What-if and If–only problem Emotional responses to outcomes often are influenced by what might have been i.e how easily one can conjure up alternate outcomes, and counterfactual thinking often ends in regret.
  46. 46. www.eightytwentyinvestor.com
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  52. 52. www.eightytwentyinvestor.com
  53. 53. www.eightytwentyinvestor.com
  54. 54. www.eightytwentyinvestor.com
  55. 55. www.eightytwentyinvestor.com 1. Loss Aversion + Amygdala + Obsessive monitoring 2. Social Proof 3. Expert Bias 4. Counterfactual thinking & Regret 5. Scarcity of time 6. Action Bias 1.Ego (Cognitive Dissonance) 2.Existing patterns
  56. 56. www.eightytwentyinvestor.com
  57. 57. www.eightytwentyinvestor.com
  58. 58. www.eightytwentyinvestor.com Date Loss (in lakhs) Date Loss (in lakhs) 01-Jan-08 0 10-Jan-09 -54 16-Jan-08 -2 25-Jan-09 -57 31-Jan-08 -13 09-Feb-09 -53 15-Feb-08 -11 24-Feb-09 -57 01-Mar-08 -13 11-Mar-09 -60 16-Mar-08 -22 26-Mar-09 -51 31-Mar-08 -23 10-Apr-09 -47 15-Apr-08 -20 25-Apr-09 -44 30-Apr-08 -15 10-May-09 -41 15-May-08 -15 25-May-09 -31 30-May-08 -19 09-Jun-09 -25 14-Jun-08 -25 24-Jun-09 -29 29-Jun-08 -32 09-Jul-09 -32 14-Jul-08 -34 24-Jul-09 -24 29-Jul-08 -32 08-Aug-09 -25 13-Aug-08 -26 23-Aug-09 -25 28-Aug-08 -31 07-Sep-09 -21 12-Sep-08 -31 22-Sep-09 -17 27-Sep-08 -35 07-Oct-09 -17 12-Oct-08 -48 22-Oct-09 -17 27-Oct-08 -58 06-Nov-09 -20 11-Nov-08 -52 21-Nov-09 -16 26-Nov-08 -56 06-Dec-09 -16 11-Dec-08 -52 21-Dec-09 -18 26-Dec-08 -54 05-Jan-10 -13
  59. 59. www.eightytwentyinvestor.com
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  64. 64. www.eightytwentyinvestor.com
  65. 65. www.eightytwentyinvestor.com
  66. 66. www.eightytwentyinvestor.com If…. Then…. “If a customer yells at me then I will ______”.
  67. 67. www.eightytwentyinvestor.com
  68. 68. www.eightytwentyinvestor.com
  69. 69. www.eightytwentyinvestor.com
  70. 70. www.eightytwentyinvestor.com 5. Frame it under the right perspective Consider your entire adult life as your investing time horizon
  71. 71. www.eightytwentyinvestor.com
  72. 72. www.eightytwentyinvestor.com
  73. 73. www.eightytwentyinvestor.com
  74. 74. www.eightytwentyinvestor.com

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