Emotions Of a Investor

Friday, November 13, 2009

Image by Getty Images via Daylife

Emotions are strong feelings and play a important role in the formulation of investment decisions. Most investment decisions are motivated by greed,fear and hope.
In a bull market, greed is the main motivating force fuelling investment decisions. Investors throw caution to the winds, borrow money at high rates of interest, stretch their financial resources , and take other unwarranted risks. In the bear market, on the other hand, fear is the dominating emotion. Fear leads to panic selling and unloading of otherwise sound scripts at unbelievably low prices.

Frequently, investment decisions are based on hope. An investor may want to buy a particular share because he thinks it will go up, but because he hopes that it will. Hope also sometimes makes an investor cling on to a share whose price is falling rapidly in the hope that it will eventually rebound to its original price. Wishful thinking is another word for hope.
Emotions distort the decision-making process. They frequently override reason, logic and some times even facts this happens especially when emotions come disguised as reason. They prevent investors from seeing reality as it really is , and not what they would want it to be. Emotions also prevent investors from changing their minds when proved wrong, or when there is need to change and adopt a different line of thinking.

Excessive fear, on the other hand, is a dangerous emotion because it can lead to panic selling and prevent the investor from picking up bargains in an atmosphere of doom and gloom..... the ideal time to do so.