The document discusses various cognitive biases that can negatively impact investors' decision making. It describes how the author herself suffers from biases like confirmation bias, overconfidence bias, loss aversion, and the disposition effect. For example, she is reluctant to sell stocks that have lost value in hopes they will rebound. The document also summarizes a study finding that older, wealthier men are particularly prone to biases that can undermine investment performance, such as taking excessive risks when gains are made. The study suggests financial education should address cognitive biases to help investors make more optimal decisions.
Behavioral finance and investment decisionaashima1806
Behavioral Finance is all related to the behavior of the investor at the time of investing in different market conditions.. same is exhibited in our presentation by compiling different questions related to investment for different investors on the basis of different age groups...
Behavioral finance and investment decisionaashima1806
Behavioral Finance is all related to the behavior of the investor at the time of investing in different market conditions.. same is exhibited in our presentation by compiling different questions related to investment for different investors on the basis of different age groups...
A research study on investors behaviour regarding choice of asset allocation ...SubmissionResearchpa
Every rational economic decision maker would prefer to avoid a loss, to have benefits be greater than costs, to reduce risk, and to have investments gain value. Loss aversion refers to the tendency to loathe realizing a loss to the extent that you avoid it even when it is the better choice. How can it be rational for a loss to be the better choice? Say you buy stock for $100 per share. Six months later, the stock price has fallen to $63 per share. You decide not to sell the stock to avoid realizing the loss. If there is another stock with better earnings potential, however, your decision creates an opportunity cost. You pass up the better chance to increase value in the hopes that your original value will be regained. Your opportunity cost likely will be greater than the benefit of holding your stock, but you will do anything to avoid that loss. Loss aversion is an instance where a rational aversion leads you to underestimate a real cost, leading you to choose the lesser alternative. Aim of this paper is to identify the various factors which are affecting to the investment decision and behavioural finance by Gobinda Dhamala, Khushboo Sharma, Kunal Jaiswal, Dimple Patel, Pooja Singh and Ritu Sinha 2020. A research study on investors behaviour regarding choice of asset allocation of teaching staff. International Journal on Integrated Education. 3, 3 (Mar. 2020), 126-135. DOI:https://doi.org/10.31149/ijie.v3i3.298 https://journals.researchparks.org/index.php/IJIE/article/view/298/291 https://journals.researchparks.org/index.php/IJIE/article/view/298
Presentation will give you simple tips on how to make right financial decision. Very small but disciplined investment over long time can make fortunes.
“Impact of Behavioral Biases on Investors Decision Making: Male Vs Female”IOSR Journals
This study aims to investigate the influence of behavioral biases on investment decisions made by students and employees. This objective was achieved by administering a questionnaire and collecting empirical data from graduate & post graduate students and employees about their own perceptions of biases. Questionnaire was distributed among the sample of hundred students/employees from which 45% were students and 55% were employees. Two statistical techniques were used to analyze collected data. Correlation was used to analyze the relationship of overconfidence bias with illusion of control bias, familiarity bias, loss aversion bias and confirmation bias. Chi-square was used to determine the significant difference between the responses of male and female about overconfidence bias. Results of this study reports weak negative correlation between overconfidence bias and other behavioral bias discussed in the study. This study concludes there is no significant difference between the responses of male and female decision making regarding overconfidence bias.
This presentation slide is about the concept of Mental Accounting Bias. Biases are one of the important concept in Behavioral Finance and influence the decision making ability of an individual.
Emotions Affect Markets in Predictable Ways: Behavioral Finance and Sentiment...Cristian Bissattini
Financial markets are not purely rational. Emotions play a large part in stock pricing. H2O Sentiment Analysis captures these emotions, the “animal spirits” coined by Keynes, through social media post messages.
We employ a novel way to capture and quantify sentiment based on authors' credibility, namely tracking the accuracy of past recommendations. Our results provide evidence that there is strong and useful information on investor sentiment and likely stock market movements.
Our research (done in collaboration with the Università della Svizzera italiana) has demonstrated that we can use this information in order to make predictions about stock price changes and to implement trading strategies based on sentiment analysis that perform, on average, better than traditional investment strategies like Buy and Hold or Moving Averages.
What women can teach men about investingAlpesh Patel
Women Make Better Investors, That’s the Truth. But why?
In this presentation I cover:
* Why Women Typically Invest Less Than Men
* Why Women Make Better Investors
* Women Panic Sell Less Than Men
* Women Take Fewer Risks
* More Research, Less Panic
* Women in Hedge Funds
* The Confidence Problem
* Why Don’t More Women Invest?
Carla Zevnik-Seufzer • The Strategic Financial Alliance
- The problem with pie charts by Greg Gann
- Oil price surge troubling, but still within ranges
- Serving special needs (Russell Luce, Foresters Equity Services, Inc.)
Daniel Namey • H. Beck, Inc.
- The (not so) indomitable investor: 9 reasons most investors lack the discipline to succeed by David Wismer
- Can gold maintain momentum?
- Setting client expectations around active management (Carla Zevnik-Seufzer, The Strategic Financial Alliance)
A Study of Behavioural Factors Affecting Individual Investment Decisionsijtsrd
Although finance has been studied for thousands of years, behavioral finance which considers the human behaviour in finance is a pretty new area. Behavioral finance theories, which might be based totally at the psychology, try to apprehend how feelings and cognitive mistakes impact man or woman traders' behaviour buyers referred to on this look at are referred to person traders .The primary goal of this have a look at is exploring the behavioral factors influencing person buyers' selections on the NSE and BSE Stock Exchange. Furthermore, the members of the family among these elements and funding overall performance also are tested. The have a look at begins with the present theories in behavioral finance, based totally on which, hypotheses are proposed. Then, those hypotheses are examined via the questionnaires dispensed to individual buyers on the Broking Firms, college students and professionals. The data collected from the Stock Broking firms, Students, Professionals through structured questionnaire were examined and data collected were analyzed using Cronbachs Alpha Reliability Test, based totally on which, hypotheses are proposed. The result indicates that there are 5 behavioral elements affecting the funding selections of person investors at the NSE and BSE Stock Exchange Herding, Market, Prospect, Overconfidence gamble's fallacy, and Anchoring ability bias. Most of these elements have mild impacts whereas Market element has high affect. This test also tries to discover the correlation among these behavioral factors and investment overall performance. Among the behavioral factors referred to above, best 3 elements are located to influence the Investment Performance Herding inclusive of shopping for and promoting choice of trading shares extent of buying and selling stocks velocity of herding , Prospect such as loss aversion, remorse aversion, and mental accounting , and Heuristic inclusive of overconfidence and gamble's fallacy . The heuristic behaviors are determined to have the highest advantageous impact at the investment overall performance while the herding behaviors are stated to persuade undoubtedly the investment overall performance on the lower degree. In assessment, the possibility behaviors provide the negative impact on the funding overall performance. Pawankumar S Hallale | Manjiri Gadekar "A Study of Behavioural Factors Affecting Individual Investment Decisions" Published in International Journal of Trend in Scientific Research and Development (ijtsrd), ISSN: 2456-6470, Volume-3 | Issue-6 , October 2019, URL: https://www.ijtsrd.com/papers/ijtsrd28100.pdf Paper URL: https://www.ijtsrd.com/management/business-economics/28100/a-study-of-behavioural-factors-affecting-individual-investment-decisions/pawankumar-s-hallale
Chuck Bigbie • Geneos Wealth Management
- Investor confusion about passive investing: three common misconceptions about passive investing by Jerry Wagner
- Second quarter earnings in focus
- Simple is better for client reviews (Kimble Johnson, LPL Financial)
4 active vs passive advisor insert funds flows dfa (advisor present) p. 1-3, ...Weydert Wealth Management
This excellent article contains three key graphics illustrating how average investors flow into and out of investments at the wrong times and contrasts this with the average DFA investor who remains much more consistent and disciplined.
Jay Blanchard • NEXT Financial Group, Inc.
- Tackling the herd through sentiment indicators by Linda Ferentchak
- Conflicting data adds to market uncertainty
- Social Security strategies as prospect "hot buttons" (Richard D'Ambola, Questar Capital Corporation)
The difference between speculating and investing. The broccoli approach is better for you in the long run even though the pizza approach may be more exciting. Exciting rarely pays your bills when retired though.
A research study on investors behaviour regarding choice of asset allocation ...SubmissionResearchpa
Every rational economic decision maker would prefer to avoid a loss, to have benefits be greater than costs, to reduce risk, and to have investments gain value. Loss aversion refers to the tendency to loathe realizing a loss to the extent that you avoid it even when it is the better choice. How can it be rational for a loss to be the better choice? Say you buy stock for $100 per share. Six months later, the stock price has fallen to $63 per share. You decide not to sell the stock to avoid realizing the loss. If there is another stock with better earnings potential, however, your decision creates an opportunity cost. You pass up the better chance to increase value in the hopes that your original value will be regained. Your opportunity cost likely will be greater than the benefit of holding your stock, but you will do anything to avoid that loss. Loss aversion is an instance where a rational aversion leads you to underestimate a real cost, leading you to choose the lesser alternative. Aim of this paper is to identify the various factors which are affecting to the investment decision and behavioural finance by Gobinda Dhamala, Khushboo Sharma, Kunal Jaiswal, Dimple Patel, Pooja Singh and Ritu Sinha 2020. A research study on investors behaviour regarding choice of asset allocation of teaching staff. International Journal on Integrated Education. 3, 3 (Mar. 2020), 126-135. DOI:https://doi.org/10.31149/ijie.v3i3.298 https://journals.researchparks.org/index.php/IJIE/article/view/298/291 https://journals.researchparks.org/index.php/IJIE/article/view/298
Presentation will give you simple tips on how to make right financial decision. Very small but disciplined investment over long time can make fortunes.
“Impact of Behavioral Biases on Investors Decision Making: Male Vs Female”IOSR Journals
This study aims to investigate the influence of behavioral biases on investment decisions made by students and employees. This objective was achieved by administering a questionnaire and collecting empirical data from graduate & post graduate students and employees about their own perceptions of biases. Questionnaire was distributed among the sample of hundred students/employees from which 45% were students and 55% were employees. Two statistical techniques were used to analyze collected data. Correlation was used to analyze the relationship of overconfidence bias with illusion of control bias, familiarity bias, loss aversion bias and confirmation bias. Chi-square was used to determine the significant difference between the responses of male and female about overconfidence bias. Results of this study reports weak negative correlation between overconfidence bias and other behavioral bias discussed in the study. This study concludes there is no significant difference between the responses of male and female decision making regarding overconfidence bias.
This presentation slide is about the concept of Mental Accounting Bias. Biases are one of the important concept in Behavioral Finance and influence the decision making ability of an individual.
Emotions Affect Markets in Predictable Ways: Behavioral Finance and Sentiment...Cristian Bissattini
Financial markets are not purely rational. Emotions play a large part in stock pricing. H2O Sentiment Analysis captures these emotions, the “animal spirits” coined by Keynes, through social media post messages.
We employ a novel way to capture and quantify sentiment based on authors' credibility, namely tracking the accuracy of past recommendations. Our results provide evidence that there is strong and useful information on investor sentiment and likely stock market movements.
Our research (done in collaboration with the Università della Svizzera italiana) has demonstrated that we can use this information in order to make predictions about stock price changes and to implement trading strategies based on sentiment analysis that perform, on average, better than traditional investment strategies like Buy and Hold or Moving Averages.
What women can teach men about investingAlpesh Patel
Women Make Better Investors, That’s the Truth. But why?
In this presentation I cover:
* Why Women Typically Invest Less Than Men
* Why Women Make Better Investors
* Women Panic Sell Less Than Men
* Women Take Fewer Risks
* More Research, Less Panic
* Women in Hedge Funds
* The Confidence Problem
* Why Don’t More Women Invest?
Carla Zevnik-Seufzer • The Strategic Financial Alliance
- The problem with pie charts by Greg Gann
- Oil price surge troubling, but still within ranges
- Serving special needs (Russell Luce, Foresters Equity Services, Inc.)
Daniel Namey • H. Beck, Inc.
- The (not so) indomitable investor: 9 reasons most investors lack the discipline to succeed by David Wismer
- Can gold maintain momentum?
- Setting client expectations around active management (Carla Zevnik-Seufzer, The Strategic Financial Alliance)
A Study of Behavioural Factors Affecting Individual Investment Decisionsijtsrd
Although finance has been studied for thousands of years, behavioral finance which considers the human behaviour in finance is a pretty new area. Behavioral finance theories, which might be based totally at the psychology, try to apprehend how feelings and cognitive mistakes impact man or woman traders' behaviour buyers referred to on this look at are referred to person traders .The primary goal of this have a look at is exploring the behavioral factors influencing person buyers' selections on the NSE and BSE Stock Exchange. Furthermore, the members of the family among these elements and funding overall performance also are tested. The have a look at begins with the present theories in behavioral finance, based totally on which, hypotheses are proposed. Then, those hypotheses are examined via the questionnaires dispensed to individual buyers on the Broking Firms, college students and professionals. The data collected from the Stock Broking firms, Students, Professionals through structured questionnaire were examined and data collected were analyzed using Cronbachs Alpha Reliability Test, based totally on which, hypotheses are proposed. The result indicates that there are 5 behavioral elements affecting the funding selections of person investors at the NSE and BSE Stock Exchange Herding, Market, Prospect, Overconfidence gamble's fallacy, and Anchoring ability bias. Most of these elements have mild impacts whereas Market element has high affect. This test also tries to discover the correlation among these behavioral factors and investment overall performance. Among the behavioral factors referred to above, best 3 elements are located to influence the Investment Performance Herding inclusive of shopping for and promoting choice of trading shares extent of buying and selling stocks velocity of herding , Prospect such as loss aversion, remorse aversion, and mental accounting , and Heuristic inclusive of overconfidence and gamble's fallacy . The heuristic behaviors are determined to have the highest advantageous impact at the investment overall performance while the herding behaviors are stated to persuade undoubtedly the investment overall performance on the lower degree. In assessment, the possibility behaviors provide the negative impact on the funding overall performance. Pawankumar S Hallale | Manjiri Gadekar "A Study of Behavioural Factors Affecting Individual Investment Decisions" Published in International Journal of Trend in Scientific Research and Development (ijtsrd), ISSN: 2456-6470, Volume-3 | Issue-6 , October 2019, URL: https://www.ijtsrd.com/papers/ijtsrd28100.pdf Paper URL: https://www.ijtsrd.com/management/business-economics/28100/a-study-of-behavioural-factors-affecting-individual-investment-decisions/pawankumar-s-hallale
Chuck Bigbie • Geneos Wealth Management
- Investor confusion about passive investing: three common misconceptions about passive investing by Jerry Wagner
- Second quarter earnings in focus
- Simple is better for client reviews (Kimble Johnson, LPL Financial)
4 active vs passive advisor insert funds flows dfa (advisor present) p. 1-3, ...Weydert Wealth Management
This excellent article contains three key graphics illustrating how average investors flow into and out of investments at the wrong times and contrasts this with the average DFA investor who remains much more consistent and disciplined.
Jay Blanchard • NEXT Financial Group, Inc.
- Tackling the herd through sentiment indicators by Linda Ferentchak
- Conflicting data adds to market uncertainty
- Social Security strategies as prospect "hot buttons" (Richard D'Ambola, Questar Capital Corporation)
The difference between speculating and investing. The broccoli approach is better for you in the long run even though the pizza approach may be more exciting. Exciting rarely pays your bills when retired though.
Economic life is full of uncertainties and only thing
that is certain here is that most of it is conducted into the
dynamic environment; this brings a question in point though:
Why individuals opt for entrepreneurship that involves a good
amount of risk, and where there are little or no returns? There
are ample research data available to show people are more
optimistic when decision is taken under uncertainty and even
show overconfidence in the judgement.
The relative ability is often overestimated by the overconfident
individuals and so probabilistically, their perceptions for their
actions seem to be safer to them in comparison to those who
show no overconfidence. Interesting findings are shown in the
sample of 2,944 entrepreneurs there are as many as 81%
people who feel their chances of obtaining success are at least
70%, there are 33% other people with a belief that the
probability of 100% exists in terms of their chances of success.
The truth is that, as many as 75% new businesses fail to
exist after 5 years. Here arises a question that, are the
entrepreneurs not in a position to see the risk, or do they carry
a different perception of the risk involved in their acts? Going
through a recent study, it is clear that the entrepreneurs are
very much cautious (even more than what we think) and the
opinion that entrepreneurs have more tolerance for risk is
considered wrong in the findings.
There are few cases though, where entrepreneurs seem to
bear less risk than normal, still it does not stop them to take
risk.
Some people find these findings controversial, but the
truth is that, it is not the case. Different dimensions are set by
entrepreneurs for uncertainty; therefore, the oxymoron as
discussed above in reality justifies their actions.
As per the belief of entrepreneurs, there are two
dimensions of uncertainty: Uncertainty related to the ability
and the uncertainty of the market. Just like most of the people,
entrepreneurs too hate the market risk, however they do
appreciate their own abilities that results in compensating for
their hatred for risk. The main objective of this paper is to
showcase the impact of overconfidence in the behavior of
entrepreneur.
Women can't afford to avoid investing, but they don't have to do it alone either. Do your due dilligence on selecting a financial advisor who actually has additional credentials beyond just being licensed to sell you an investment. Ask the advisor how long they have been in the business, and what have they done to become a better advisor since they started. Just because someone has been in the business 15 years, doesn't mean they haven't simply repeated the first year 14 other times!
Behavioral Finance Jay R. Ritter Cordell Professor .docxAASTHA76
Behavioral Finance
Jay R. Ritter
Cordell Professor of Finance
University of Florida
P.O. Box 117168
Gainesville FL 32611-7168
http://bear.cba.ufl.edu/ritter
[email protected]
(352) 846-2837
Published, with minor modifications, in the
Pacific-Basin Finance Journal Vol. 11, No. 4, (September 2003) pp. 429-437.
Abstract
This article provides a brief introduction to behavioral finance. Behavioral finance encompasses
research that drops the traditional assumptions of expected utility maximization with rational
investors in efficient markets. The two building blocks of behavioral finance are cognitive
psychology (how people think) and the limits to arbitrage (when markets will be inefficient).
The growth of behavioral finance research has been fueled by the inability of the traditional
framework to explain many empirical patterns, including stock market bubbles in Japan, Taiwan,
and the U.S.
JEL classification: G14; D81
Keywords: Behavioral finance; arbitrage; psychology; market efficiency
A modified version of this paper was given as a keynote address at the July, 2002
APFA/PACAP/FMA meetings in Tokyo. I would like to thank Ken Froot and Andrei Shleifer
for sharing their data and ideas, and Rongbing Huang for research assistance.
2
Behavioral Finance
1. Introduction
Behavioral finance is the paradigm where financial markets are studied using models that
are less narrow than those based on Von Neumann-Morgenstern expected utility theory and
arbitrage assumptions. Specifically, behavioral finance has two building blocks: cognitive
psychology and the limits to arbitrage. Cognitive refers to how people think. There is a huge
psychology literature documenting that people make systematic errors in the way that they think:
they are overconfident, they put too much weight on recent experience, etc. Their preferences
may also create distortions. Behavioral finance uses this body of knowledge, rather than taking
the arrogant approach that it should be ignored. Limits to arbitrage refers to predicting in what
circumstances arbitrage forces will be effective, and when they won't be.
Behavioral finance uses models in which some agents are not fully rational, either
because of preferences or because of mistaken beliefs. An example of an assumption about
preferences is that people are loss averse - a $2 gain might make people feel better by as much as
a $1 loss makes them feel worse. Mistaken beliefs arise because people are bad Bayesians.
Modern finance has as a building block the Efficient Markets Hypothesis (EMH). The EMH
argues that competition between investors seeking abnormal profits drives prices to their
“correct” value. The EMH does not assume that all investors are rational, but it does assume that
markets are rational. The EMH does not assume that markets can foresee the future, but it does
assume that markets make unbiased forecasts ...
Behavioral finance, heuristics and marketing A.W. Berry
Economic and financial heuristics explain how people's money related decision making is influenced by psychology and sociological trends. This is relevant in the marketing profession and to corporate strategists because purchase decisions, stock market investing and other financial decision making is linked to consumer behavior.
1. Fiona Chan
One of the biggest ongoing debates
in economics is the validity of
homo economicus: the idea that
human beings are rational and act
in their own interests.
This concept, which underpins
many economic theories and mod-
els, assumes consumers and inves-
tors make logical decisions for the
sole purpose of maximising their
happiness and profits.
As a consumer, I think I am fair-
ly rational. As an investor, howev-
er, I may be one of the least sensible
people ever.
There are many well-document-
ed biases that investors are prone
to, and unfortunately most of them
apply to me.
Confirmation bias, for instance:
I often make up my mind about
which stock to buy and then look
for proof to support my decision.
I also suffer from overconfi-
dence bias – believing that I am
right more often than I really am –
not just in investments, but general-
ly in life.
But my biggest failings are with
regard to risks and potential losses.
I am highly loss-averse, which
means I feel the loss of $100 much
more keenly than a gain of $100.
Worse than that, I am afflicted
by the so-called “disposition
effect”, which is the tendency to
sell shares that are rising in value
but hold on to those that have fall-
en, in the stubborn hope that they
will one day claw their way back
into positive territory.
In other words, I lack one of the
most basic investing skills: I am psy-
chologically unable to cut my loss-
es. There are, sadly, plenty of exam-
ples to illustrate this, but I shall
give just one. In 2011, I bought one
lot of shipping company Neptune
Orient Lines (NOL) at slightly more
than $1.40 per share.
In lieu of exhaustive analysis, I
had simply noted that NOL’s price
had recently suffered a steep drop
from what I thought of as its “usu-
al” price of around $2, the value it
had held over the previous year.
This is also a bias, known as “an-
choring”, in which an initial
approximation of an object’s value
affects one’s perception of its subse-
quent values. Because I thought
NOL shares were worth around $2,
$1.40 looked cheap to me.
To cut a painful story short,
NOL’s price continued to fall after
my purchase and is now struggling
to stay at around $1.10.
Despite valid grounds to bite the
bullet and sell the stock – continu-
ing red ink, a challenging industry
outlook, possible better use of my
money elsewhere – I simply find it
too painful to convert my paper
loss into a real one.
As I see it, there is a variety of rea-
TURN TO PAGE 41
Men who are older, richer and savvier
are more prone to biases when invest-
ing, a new survey has found.
The study, by three students from
the Nanyang Business School of the
Nanyang Technological University
(NTU), shows that gender, age and
smarts all affect investing bias – some-
times in surprising ways.
For instance, men are more overcon-
fident about their investing ability than
women, according to students Chiang
Jia Bing, Joel Siew and Raymond Toh.
“After a long winning streak, (men)
tend to believe they will consistently
outperform the market and hence trade
excessively,” said the students, who
polled 221 Singapore investors.
“Unfortunately, this leads to signifi-
cant errors as they brush aside subse-
quent mistakes as aberrations.”
Men also suffer more from the dispo-
sition effect, the survey has found. They
sell winning stocks too soon and hold
losing ones too long, leading to lower
gains and larger losses.
Lastly, men are more likely than
women to have “home bias”: a prefer-
ence for investing in local shares over
foreign counters.
Because of this, they overallocate
funds to the local market and forgo
some geographical diversification bene-
fits, the NTU students said.
Older investors are also subject to the
same biases, the study shows. In addi-
tion, investors also tend to fall prey to
loss aversion and confirmation bias as
they age.
Confirmation bias is when investors
seek only proof of their beliefs and ig-
nore contrary data. Loss aversion,
where the pain of losing money out-
weighs the pleasure of profit, skews a
portfolio towards safe investments with
low returns.
Interestingly, investors with higher
income, education and financial litera-
cy are more prone to the overconfi-
dence and disposition effect biases, but
less to loss aversion, the study shows.
The findings are important as inves-
tors led astray by bias may have under-
performing portfolios, said the NTU
banking and finance students, who are
all in their final year of studies.
The students, led by their supervisor,
Dr Kong Yoon Kee, also noted that the
study results are “worrying” because
men tend to be more involved in house-
hold investment decisions and because
Singapore’s population is ageing.
“Investment bias is an important ele-
ment that is often overlooked, and un-
derestimated,” they concluded.
“In the light of this, investor advoca-
cy groups should extend financial edu-
cation to include awareness about in-
vestment biases and their risks.”
Fiona Chan
Loss-averse, overconfident... that’s me
Older, richer, savvier men more prone to biases
Investment biases can
cloud one’s judgment
and lead to lower
gains and larger losses
[ small40 investthesundaytimes May 12, 2013
2. sons people like me shy from cut-
ting our losses.
One is the unshakeable belief
that stocks go up and down in
cycles, and that if you just hang on
long enough, your loss-making
stock will eventually turn into a
profitable one.
But this argument has two prob-
lems. The first is that not all stocks
regain their past highs no matter
how long you wait, and a falling
share price is often indicative of
deeper troubles that portend even
further price drops.
The second problem is that the
money that is tied up in your lan-
guishing investment could be
invested more wisely in other assets
and make up for having to cut your
losses. The $300 or so I’ve lost on
NOL, for instance, could easily
have been made back by now if I
had bought shares in any Singa-
pore bank.
The other reasons for failing to
cut losses are even less justifiable.
Sometimes investors just do not
like to admit when they have been
wrong. If their paper loss is never
realised, technically the stock can
still do a U-turn and prove them
right for holding on so long.
There is also inertia: People tend
to monitor their well-performing
stocks, but ignore those that have
deteriorated beyond a certain
threshold.
I offer my investing story as a
cautionary tale. To avoid following
in my footsteps, I suggest setting a
clear limit for cutting losses and
remembering that after a stock has
lost 50 per cent of its value, it needs
to rise by 100 per cent for you to
just break even.
If all else fails, knowing your
own biases can at least help you for-
mulate a better investment strate-
gy. I now bank on blue-chip divi-
dend yield plays, so even if the
counter falls, my total return may
not be a complete write-off.
The really tragic part of this
whole story is that, according to
recent research done by students at
the Nanyang Technological Univer-
sity’s Nanyang Business School, my
investing habits resemble those of
an old man.
Messrs Chiang Jia Bing, Joel Siew
and Raymond Toh and their super-
visor, Dr Kong Yoon Kee, polled
221 Singapore investors and found
that age and gender are correlated
to certain decision-making biases
(see story on Page 40).
Specifically, they found that the
disposition effect is a quirk of older
male investors, although it is also
the most prevalent bias among all
investors and particularly affects
the higher-educated.
“Cutting losses protects one’s
capital should the investment go
awry,” say the students.
“It is good practice to set cut-loss
levels when initiating investments
and be disciplined in keeping to
them, rather than reasoning that
adverse market movements are tem-
porary and reversible,”
Wise advice indeed. Now if only
I could overcome my bias against
accepting counsel from those
younger than me.
fiochan@sph.com.sg
FROM PAGE 40
Set clear targets for cutting losses
change ] 41investMay 12, 2013 thesundaytimes