Trading in the financial markets is a combination of fear, risk and greed. However, in order to act differently or not get caught up in repetitive potholes, a newer approach must be taken. We may even have to look beyond our fears and greed to find a smoother way to get out of the way. In this article, we go to the book ” Beyond Greed and Fear ” by “Hersh Shefrin” and examine his view on trading with the naked eye. If you want to figure out some of the big mistakes in the financial markets and the world of investing, stay tuned for the rest of this book [ Beyond Greed and Fear ] .
Where did financial behavior come from?
Financial behavior emerged as psychologists became interested in finance and economics. In fact, financial markets were a pristine bedrock for psychologists. Since investors usually think of themselves as rational, accountable people with no clue about their financial behavior and the decisions they make.
When psychologists examined financial markets and investor behavior, they noticed long series of repetitive and predictable investor mistakes. Little by little, the financial markets and the people active in them also paid attention to this issue. Because recognizing these mental errors could save their capital !
Why should we think beyond our fear and greed?
Many capital marketers or authors of popular behavioral finance books emphasize that investors can look ahead with a wider eye by recognizing their own mental errors. This helps them make wise and even wise decisions about the fate of their capital.
On the other hand, in Beyond Fear and Greed, we read that knowing just our own mental errors is not enough to make smart decisions in the financial markets, but we must also have a deep awareness of discovering the mental errors of other investors in the financial markets. Whether we like it or not, they have a direct impact on the market price and its direction with their mental errors. This means taking a few steps back and looking at the bigger picture.
Judgment based on clichés; an error lurking in investors
Significant mental errors have paved the way for investors’ financial decision-making. “Judgment based on stereotypes” is one of them. Based on this mental error, the investor seeks to find a relationship between the share story and the outcome of its current rise or fall, rather than focusing on the actual data and the cause.
Let us explain more; for instance, when a stock in a capital market falls in price, ordinary investors attach a “bad market” label to it and no longer follow it. In their view, that share becomes the representative of all really bad shares. But if they are aware of this mental error and consider it beyond their fear and greed, they will not immediately place that share in the category of evils and will not predict its future negatively.
Rather, they take a neutral view of the matter and at least try not to make hasty decisions. Note that this is just as damaging when it comes to the current best market shares. For example, they predict the future of a stock that has performed well in the past in an extremely positive way, and it is not at all likely that this company will make a mistake and lose the value of its shares.
The story of escaping from harm and plunging faster into the swamp of loss!
No sane person likes to lose. Everyone loves to succeed, to profit and to get rich; yet stepping into the financial markets means accepting the fact that even if you are smart, you can still lose! However, do to the fact that we humans – including investors – are not so happy to hear the truth, we must ignore it and easily ignore it.
For this reason, when our share is losing, instead of selling the share and getting out of it, we pray in our hearts that our share grows again and our capital is revived. By doing so, instead of moving beyond fear and greed, we lose the only remaining opportunities to save the rest of our capital.
This phenomenon, which behavioral financial psychologists call “loss avoidance”, is happening every day, on a large and small scale. The solution to this mental error and delusion is to be aware of its existence. Since you find the ability to get your wrist in place and manage losses.
Why should investors shy away from overconfidence?
The next case we encounter in the book is the story of “excessive self-confidence”. Normally, when we talk about topics like “personal development” or “goal setting”, everyone is looking to make a difference in their lives by increasing their self-confidence. But when it comes to investing in financial markets, boosting self-confidence can be quite detrimental.
An investor with high self-confidence engages in risky trading situations, the number of trades he makes is high, and in most cases, he is overly optimistic about the future of stocks.
The combination of optimism and high self-esteem is a deadly poison to capital since it deprives the investor of a deep understanding and awareness, and imposes a risk on him. Perhaps the best advice we can give to financial market investors is to be pessimistic when trading in the capital market and choose to be neutral instead of positive. This will help you to have a chance to see the reality of the market without orientation.
Technical analysis is good, but not as good as fundamental analysis
To move beyond fear and greed, it is better to accept that technical analysis, despite the loud noise of its supporters, is a form of gambling on charts. Instead of looking for the cause of the rise or fall of stock values, it seeks to predict the next shape of the charts. Perhaps this is why most of the time the water of fundamental and technical analysts does not flow in the same atmosphere and their disagreement is not a joke. Technical analysts rely on history and emotion, but fundamental analysts pay attention to numbers, figures, and data.
The interesting thing is that sometimes the market, due to the emotional pressure of traders, shows a strange trend, far from predicting the numbers. This is where technical analysis shows their predictive power to the fundamentals. However, the best thing to do is to stand somewhere in the middle of the technical or fundamental spectrum instead of moving biasedly.
Dealing with the inflation monster
Dealing with inflation also requires behavior beyond fear and greed because it can easily affect the value of stocks. It can be said that the biggest blow to inflation in financial markets is due to the extreme reactions of individuals. Especially when we are going to pay more to buy a stock as of inflation and then make less profit, we understand this with more dissatisfaction. After all, when an economy is on the brink of inflation, investors need to consider the impact of inflation on their investments in any way they can. This is not really the case. Simply put, investors, if they consider inflation, go beyond their perception of past inflation and ignore the numerical value of current inflation.
Counting on trends is an old but repetitive mistake
A significant portion of investors rely on the words or analysis of TV or media analysts to make their own financial decisions. They think that analysts have mastered secret data, and that every word they say is a secret hint to do something profitable. However, even the best analysts cannot comment on your contribution better than you. The point that we must not forget is that no one can fully and definitively predict financial markets. Because this feature was not placed in the human body and mind from the beginning.
This is like saying that a successful analyst can see behind steel walls with his own eyes. And if you cannot, he cannot either. So, even if you are unable to rival your interest in pursuing financial analysis, do at least one favor to yourself, and that is that once you start and act on the analysis you have heard, do not give them credit once. Test yourself and then take action. It will literally move beyond fear and greed.
Pay attention to momentum and take it seriously
“Momentum” is a situation in which investors overreact to the information they see, obtain, or hear; For example, when an analyst talks about the growth of a stock, suddenly a lot of luck goes to that stock, or vice versa, sometimes shareholders, seeing one or two signs of falling stock prices, sell it and leave.
The momentum phenomenon is directly related to the volume of transactions. This means that if after witnessing a flow or hearing a recommendation you see an abnormal increase in the volume of trades on a particular stock, you can consider it momentarily with an acceptable percentage. You may be interested to know that, most of all, short-term investors are affected by this phenomenon, and in many cases, and they are forced to pay taxes and transaction fees instead of making a profit. This means that even if those news and events make a profit, in the end, the costs and profits go up and nothing catches the investor!
Why is it wrong to hope in the capital market?
Fear and greed are two familiar feelings in financial markets. At least for those who watch these markets from afar; but what really happens is beyond fear and greed, that is, fear and hope. Investors hope that the stock will fall back to average, move away from it and become even more profitable.
Hope delights them with strange and miraculous predictions, which in turn builds false self-confidence in their minds to take a more bizarre step based on their hopeful predictions. More interestingly, fears, in turn, lead investors to false hopes.
Fear turns into anxiety in the mind of the shareholder in the back of his mind. As a result, he is more and more afraid that one day he will lose the opportunity and suffer because of his fears and stepping on the window of hope. Here, fear, instead of playing a deterrent role, fuels false hopes and worsens the situation. Our suggestion is to focus on your investment goal instead of hope and look at the market a little pessimistically.
Online traders and the illusion of having control on the market
It’s great that we can now buy and sell stocks with a laptop, tablet, or even a cell phone, but there’s another side to it, and that is the “illusion of control.” Simply put, when all the charts, information and data are easily at our fingertips, we are under the illusion that we can control what is happening in the stock market.
However, a lot of data, in most cases, instead of helping us, tie our hands and feet and make it harder for us to make decisions. More interestingly, investing online has fueled false self-confidence, hope and optimism.
Of course, we are not saying that technology should not be used or that online trading will waste your capital. Our message is that you should enter the online stock market with the awareness of these mental errors. Since in this case, you can keep the original capital and seek to hunt for hidden profits.
In the bottom line
You are the final decision-maker for your portfolio, and thus responsible for any gains or losses in your investments. Sticking to sound investment decisions while controlling your emotions apart from they being greed-based or fear-based—and not blindly following market sentiment is crucial to successful investing and maintaining your long-term strategy. Therefore, the first step in succeeding as a trader is understanding the market. You need a firm grasp on important concepts to capitalise on market opportunity.