Deciding Customer Behaviour and Investment Pattern

Financial planning and making optimal investment decisions is imperative for any individual who aims to live a financially empowered life and meet his or her financial goals. The first step to financial empowerment is inarguably to embark on this journey. However, to ensure that the journey is fruitful, one must strive to invest right. And this is where investor behaviour and pattern can act as an impediment. Investors carry with them various emotional and behavioural biases that lead to bad investment decisions, thereby impacting not just their investment experience but also their ability to meet their financial goals. Knowing and understanding these biases is a good first step towards mitigating their impact on portfolio decision making.[EasyDNNnews:PaidContentStart]

The Role of Emotions in Investing

Emotions play a significant role in investing as they influence investors’ ability to make optimal investment decisions. Both greed and fear come into play as markets move, impacting investors and compelling them to make investment decisions that are not grounded in logic. Usually when the market rallies, investors tend to invest more and when there is a correction, investors tend to rush out of the market. However, they should ideally be doing just the opposite since valuations tend to be a bit frothy after prolonged rallies and attractive after sharp downfalls. This is where emotions come into play, making investors greedy in rising markets and fearful in falling markets. A good way of overcoming this bias is to focus on long-term SIP or goal-based SIP which will help investors better weather the ups and downs of the market and benefit from the compounding effect.

Absence of a Target or Goal(s)

Most investors do not have a target or financial goal towards which they are investing. Often, investing can be random in nature. Since the investment is not tied to a target goal, investors don’t know when to exit the investment. As a result, they let their emotions take over and exit investments at the most inopportune time, often during market lows. Having a target goal has two primary benefits: 1) it ensures that investors stay invested for a specific period of time and 2) it gives investors a sense of direction with respect to when they need to exit. Overall, it removes the randomness of the exit decision.

Recency Bias

Most people tend to recall their most recent experience with greater clarity compared to their experiences of the past. Inarguably, this ability to recall recent experiences will impact the decisions they make today as well. This is true for investors as well. Investors have good and bad experiences. When investors have a positive experience then they tend to have a positive outlook in the immediate future and the same is true for negative experiences as well. Similarly, investors tend to invest in stocks that they have heard about more recently rather than take a holistic perspective on the many investment choices available. When making investment decisions, investors should be aware of this bias and actively try to overcome it by doing holistic research and making an effort to understand the market over multiple timeframes.

Not Accepting Changes

One of the biggest emotional biases that impact investors is their inability to acknowledge and accept change. This is probably because accepting change also often involves acknowledging that one might be wrong about something or the notion that beliefs that previously made sense don’t hold true any longer. Investors often make investment decisions based on rationale that may no longer hold true due to changing market conditions. For example, an investor might have done some research and arrived at the conclusion that interest rates are likely to rise over the next two years and taken investment decisions accordingly.

However, one year later it becomes evident that the interest rates will not rise, but the investor refuses to accept this and alter the investment portfolio accordingly. Accepting change, whether in life or investing, can be very challenging. Thus, investors must not remain anchored to their investment rationale and maintain a degree of flexibility that allows them to adjust to the changing investment climate.

Conclusion

To conclude, it is important to understand that overcoming emotional and behavioural biases is a constant challenge – one that investors must actively try to overcome through target setting, disciplined research, and investing via the SIP route.



Amlesh Kumar (CFP)
Founder,Temple Capital

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