When you are new to investing, you are supposed to be cautious about the basics. Often, wealth advisors advise investors not to focus too much on the nitty-gritty of the investing principles, but on psychological strength of taking a decision, and importantly — the right one.
Morgan Housel, in The Psychology of Money, writes that doing well with money is not necessarily about what you know but about how you behave – a skill hard to learn.
These are some of the personal biases that can prevent you from becoming a pro in financial decision making:
1. Losing money is more painful than the joy of earning money: Whenever you start investing money into stocks, the key motivation of earning money is the driving force. At the same time, the avoidance of pain of losing money, invariably, impacts the decision making of most rookie investors.
In other words, investors make the ‘buy’ and ‘sell’ decisions based on avoiding to lose money more than their drive to earn money.
2. Aiming to build wealth quickly: No matter how skilled you are, it requires time to build wealth. Warren Buffett famously said that no matter how great the talent or efforts, some things just take time. “You can’t produce a baby in one month by getting nine women pregnant,” he said.
3. Vulnerable to emotions: A genius who loses control of emotions can be a financial disaster. Regular people with no financial education can be wealthy so long as they can control their behavioural skills and this has nothing to do with conventional parameters of intelligence.
In Psychology of Money, the author Morgan Housel says that your personal experiences with money make up maybe 0.00000000001 percent of what’s happened in the world, but maybe 80 percent of how you think the world works.
4. Being overly optimistic: Sometimes being overly optimistic can be financially damaging because there is always a flip side.
So, one is advised to be modest and give some importance to the protection of capital. One should be ready for unknown events and make financial plans accordingly.
5. Fears & doubts: When you let your fears and doubts dominate your decision making, you can’t take bold decisions. Overcoming your fears and doubts is the price you have to pay for investment. These are necessary to make money in the stock market.
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Updated: 25 Oct 2023, 09:08 AM IST