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In the time of geopolitical stress, market instability and economic uncertainty, emotions can become a hidden liability for investors. The temptation to react, often in a hurry, can give rise to decisions that destroy long -term returns. Understanding and managing emotional prejudices is not just a good practice; When anything in the headlines, it is necessary.
Emotional bias is not new. Examples have been well -written by economists for centuries and more recent behavior, including the late Nobel Prize winner Daniel Kahman. For example, when something happens in the stock market, we want to take action easily. We are very confident. We are afraid of disappearing. We confuse the correlation with the cause. And we are yet fascinated by tentalizing unattainable high expected returns. By understanding and learning from history, investors can avoid emotional prejudices and mistakes that others have made.
In the light of today’s markets and uncertainty in the headlines, it is worth seeing some behavioral losses, which have provoked investors for centuries, many of which I find out in my recent book, Trailblazer, heroes and crooks: stories to make you a smart investor,
Emotional bias #1: Feeling the need to sell when a big fall in the stock market
When there is a major decline in the stock market, investors may feel the need to sell. Nevertheless, it is often the worst time to sell. Instead, a better strategy is known as “masterly inactivity”, or the art of knowing when not working. This is in the dates of the Second Pinic War (218-201 BC), when the Roman dictator Quintus Fabius defeated Cartajinian Hannibal Barca, one of the greatest military commanders in history.
When Hannibal initially tried to engage Fabius in a battle, Fabius did nothing, spoiling his time until he was able to build his army. In 1974, in Zaire, Africa Muhammad Ali learned as his famous rope-e-dop strategy to defeat George Foreman as his famous rope-e-dop strategy in an epic boxing match as The Rumble in the Jungle.
In 1975, Trailblazer Jack Bogle founded the Mohra Group and introduced the first mutual fund index fund, designed as a long-term purchase-and-catch vehicle. According to Bogle, “When you listen to the news that moves the market and makes your broker call and says, ‘Do something,’ just tell him that my rule is’ don’t do something, just stand there!”
Let’s see what would have happened if an investor had been nervous after the drops of the big stock market. The worst 10 US stock market days took place in 1987, 1997, 2008 and 2020. One day drops ranged from -20% to -7.0%. The middle (or mid -range) daily loss was -8.9%. Panic selling must have stopped these losses. Alternatively, how would the master inactivity have played?
In later 10 business days, in seven out of 10 cases, the market was up, in one case the market was flat, and in only two cases the market continued downwards. The recession was continued in both of them, correcting the market immediately after 10 business days. Overall, the average average short -term rebound was 5.5%. Therefore, on an average, the master inactivity pays, related to extreme negative events.
Emotional bias #2: Extreme confidence in investment capabilities
Endo -transforms are caused by emotions and practical prejudices. A major prejudice known by several studies is that investors undergo great confidence in their abilities. Excessive confidence can lead to excessive trading. In a classic study, academics from the University of California, Brad Barber and Terence Odion, Davis examined the discount broker accounts for more than 66,000 houses between 1991 and 1996. While the overall markets were annual returns 17.9%, those investors who did the weakest trade by 6.5%. In 1998, Charlie Alice wrote the best selling book, LoseHe used the analogy of amateur tennis players who tried to play like professionals, but lost. He goes for investment. Instead of excessive trading and trying to defeat the market, it can only pay for buying and catching an index funds.
Emotional bias #3: Fear of disappearance
One of the worst emotional reactions for an investor is FOMO or fear of disappearing. This is not a new investment event. It is in at least three centuries. When famous mathematician and physicist Sir Issak Newton took huge advantage and sold in 1720 by investing in South Sea Stock. Then he saw that the stock continues to grow, and fear what he was missing, back to the peak.
He lost millions of dollars today. As he allegedly saw, “I can calculate the speed of heavenly bodies, but not the madness of the people.” Recently, many investors were burnt by FOMO in Meme Stocks such as gamestop. Once an investor sells security, they should not look back.
Emotional bias
There is no reason for correlation. This title from Washington PostA good example of that wrong in 2021 is: “Cristiano Ronaldo snatched Coca-Cola. The company’s market price fell $ 4 billion.” At a European Football Championship press conference, Ronaldo proceeded to remove two bottles of Neck, which were prominently displayed on the table in front of them.
This was shocking as the Coca-Cola was one of the official sponsors of the tournament. They replaced them with a bottle of water, saying, “Aju. No Coca-Cola.” But the stock price drop had nothing to do with Ronaldo. Rather, the stock fell on a technical that day, as expected on its pre-profit date.
Here is another example that shows correlation that this is not the reason. In 20 of the first 22 super bowls, when an original NFL team won, the stock market was up that year, and on the contrary when an AFC team won. Then the Super Bowl Indicator became very big news. But what may be the suggestion of the winner of a football game, can lead to the result of the stock market in the latter year? Simple Answer: Nothing. Not surprisingly, because the super bowl indicator appeared in the popular press, it has been debunned. This is a virtual coin toss whether the market will move forward according to prediction, as you can expect when there is no reason. Do not be foolish by spontaneous correlations.
Emotional bias #5: Want to believe something when it is not true
In 1999, Fred Wilpon, the owner of New York Met’s, agreed to buy Bobby Bonila’s contract and guaranteed him a rich postponed annuity worth 8% risk-free 8% per year. Why not, Since Wilpon and his family were invested heavy in a fund, which was providing a stable annual return of more than 14% between January 1990 and June 1999, with virtually no risk.
As Wilt was to find out, the fund run by the notorious fraud Berney Madoff was based on a Ponji plan, one of the greatest thugs ever. Clear returns were not real. If something seems great to be true, it is probably good to be true.
Emotional discipline in the era of geopolitical risk
As the global investment scenario is rapidly shaped by geopolitics and geo -economic strategy – from transferring alliances to supplying chain reality – investors face more complex and emotionally charged environment than ever. While we cannot control the headlines, we can control how we answer them. Emotional discipline is one of the most weak skills in an investor’s toolkit.
History reminds us that fear, over -confidence and reactionary behavior often lead to poor decision making, especially in unstable time. The key is not to eliminate the feeling, but to identify it, an account for it, and avoid determining the investment decisions. As a CFA Institute’s gioconomics and financial markets page highlights, flexibility today means more than diversification-it means that patience, awareness and cultivation to navigate uncertainty with clarity and long-term perspective means cultivating patience, awareness and discipline.
