Emotions and investing don’t mix

Jan 29, 2008 in Finance, Personal

Traditionally and even in some macroeconomics courses, it is said that individuals act rationally and consider all known information in the decision-making process. Traders today know this is not true. In a world where financial institutions and hedge funds use 200-300:1 leverage and markets swing wildly, there is plenty of emotion and irrational behavior to go around. Winning traders and investors make money by consistently exploiting irrational behavior, whether is it shorting a stock that just got ahead of itself, or by buying dips that happen when people panic sell.

Human emotion is a major factor in the stock market, as you have probably felt all of these:

Hope: I hope it goes back to where I bought in, I just want to break even

Fear: It has gone down everyday for the last week, I don’t want to lose everything

Greed: It just keeps going up, I should double up. How can I lose?

Despair: I just keep losing money, maybe I should quit. (more…)