Emotional Gap A Trap for Investors When Emotional Gaps Influence Decision Making
You may have heard the saying, there are only two factors that drive the investment market. Fear and greed. This metaphor does not seem far-fetched. Because it seems that in addition to mathematical information or quantitative information, emotions are like good fuel. What controls the direction of investors is greed, which drives people to buy, while fear drives people to sell assets.
In psychological studies, it has been found that the influence of emotions and biases, whether from the conscious or subconscious mind, affects the way people think, make decisions, and act, affecting almost every aspect of human life. This includes how you spend, save, and invest your money. Although we cannot completely eliminate emotions or biases. But understanding this and how these factors can affect the investment market? It is another way that will help you. You can decide to invest in any single asset. Consideration has passed from the most relevant information and facts without relying solely on instinct or emotion.
The “emotional gap” refers to making decisions based on emotions, including fear, anger, greed, bias, anxiety, and excitement. This can be considered one of the important reasons why people make irrational choices. In fact, all humans have biases whether they are conscious of them or not. Seeing a red number and a falling chart can lead to making rash decisions, such as selling an asset at a loss. This can lead to overconfidence becoming a risk. When investors fall into the emotional gap trap, they may make decisions without reason, even if it goes against your own interests.
If we notice this, we will find it in the investment prospectus, and it usually consists of the sentence: “Past performance is not indicative of future returns,” which is a sentence that can be used to remind investors well that markets cannot be predicted, so it is better not to rely on emotion when the market direction changes.
You also need to understand that decision-making is a result of the interaction of the nervous system and the body. If we are more fearful or anxious, the amygdala part of the brain that responds to fear and anxiety will become more active. By stimulating the production of the stress hormone cortisol, which leads to a decrease in the ability to control oneself and awareness. It causes us to lose the ability to think or use reason to make different decisions.
Therefore, the key is to avoid the emotional gap as best you can. When the market is volatile, it is important to learn how to manage your emotions without following them. By practicing being aware of how you are feeling at that moment. You can distinguish between emotion and reality. Do not get upset. Excited or anxious beyond reason. In addition to using a series of questions that focus on your investment goals. All of which are mentioned, this will help you analyze the options that are compatible with your intended investment plan.
Investment Sciences – Investest
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https://www.maherwm.com/blog/how-emotional-and-behavioral-barriers-may-impact-your-investing-decisions
https://www.indmoney.com/articles/personal-finance/understanding-behavioural-finance-how-emotions-affect-investment-decisions
https://www.researchgate.net/publication/331724126_Emotional_Finance_Plays_an_Important_Role_in_Investment_Decisions
https://weitzinvestments.com/resources/investor-education/a-102/how-emotions-can-cost-investors.fs
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