In the process of investment and financial management, many people often face a confusion: Why can’t they make money even though they have mastered the basic knowledge? There may be a deeper reason behind this problem.
Secrets of Investment Psychology
Investment does not solely rely on rational decision-making, psychological factors play a vital role in it. Human perceptual characteristics often have a negative impact on investment decisions, leading to investment failure. Understanding this is crucial for anyone who wants to increase their investment returns.
Basic concepts of behavioral finance
The emergence of behavioral finance is precisely to fill the shortcomings of traditional financial theory in actual investment decisions. Modern financial market theory assumes that people are rational and the market is efficient. However, in reality, investors’ decisions are often influenced by emotions and psychology. Here are some important concepts in behavioral finance:
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Identify Effect
When faced with a sure return, most people tend to choose stable options. For example, choose to get $100 risk-free rather than risk the possibility of getting $200, even if the latter has a higher expected return. -
Loss Aversion
People react more strongly when faced with loss. For example, if you lose 100 yuan, your pain will be greater than the happiness when you make a profit of 100 yuan. Therefore, many investors choose to continue to hold stocks after losing money and do not want to cut off their profits, imagining that the market will rebound. -
Herding
Investors often blindly buy or sell following the decisions of others rather than based on their own rational analysis. This phenomenon leads to a large number of irrational behaviors in the market. -
Reference dependency
Investors’ feelings of gains and losses are often relative, not absolute. You may feel dissatisfied even if you are profiting when others are making more. This psychological state can easily lead to mistakes in investment decisions.
Psychological reasons for investment failure
Understanding behavioral finance theory can help us better identify the psychological reasons for investment failure:
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Unwilling to cut flesh
When the market is bad, many investors would rather hold on to losing stocks in the hope that they will rebound in the future. This mentality reflects the effects of loss aversion. -
Pursue short-term gains
When the market performs well, many investors choose to sell amid minor fluctuations and miss greater profit opportunities. This phenomenon is a combination of deterministic effects and reference dependence. -
Frequent exchange of shares
When the market changes, if you see that your friends’ investment returns are higher than your own, you will often blindly follow the trend and exchange stocks, resulting in greater losses.
The key to becoming a rational investor
In the investment journey, success often depends on the investor’s psychological quality. To be a rational investor, you need to have the following points:
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Master financial management knowledge
Understand the basic principles of investment and market rules, and formulate a reasonable investment plan. -
Emotional Management
Learn to control your emotions and don’t let psychological factors affect your decision-making. Investors should remain calm and avoid making impulsive decisions amid market fluctuations. -
Find the right opportunity
When the market is performing poorly, wait patiently for suitable investment opportunities. At the same time, pay attention to changes in the global market and look for potential investment opportunities.
Summarize
Investment is a game of psychology and rationality. Through the understanding of behavioral finance, investors can better control their emotions and make more rational decisions, thereby increasing investment returns. Investment does not rely on luck alone, but requires a combination of wisdom and patience. I hope every investor can find a profit strategy that suits him or her in the market and achieve steady wealth growth.
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