Know thy investor psychology

It has driven bull and bear phases in investment markets and is responsible for irrational decision-making and collective behaviours

By SHANE OLIVER

UP UNTIL the 1980s the dominant theory was that financial markets were efficient - in other words all relevant information was reflected in asset prices and in a rational manner. While some think that it was the global financial crisis with its collapse in credit markets and consequent 50 per cent fall in global shares that caused faith in the so-called Efficient Markets Hypothesis (EMH) to begin unravelling, this actually occurred in the 1980s.

In fact, it was probably the October 1987 crash that drove the nail in the coffin of the EMH as it was virtually impossible to explain why US shares fell over 30 per cent and Australian shares fell 50 per cent in a two month period when there was very little in the way of new information to justify such a move. It's also hard to explain the 80 per cent slump in the tech heavy Nasdaq index between 2000 and 2002 on the basis of fundamentals alone. Sure, there was an economic downturn and slump in IT demand at the time - but this is normal and should have been allowed for in setting share prices. Study after study has shown that share market volatility is way too high to be explained by investment fundamentals alone. Something else is obviously at play, and that is investor psychology.

Investor psychology

Several aspects of investor psychology interact in helping drive bull and bear phases in investment markets, including individual lapses of logic and crowd psychology.

Irrational individuals

Numerous studies by psychologists have shown that people are not rational and tend to suffer from various lapses of logic. The most significant examples are as follows.

• Extrapolating the present into the future - people tend to downplay uncertainty and assume recent trends, whether good or bad, will continue.
• Giving more weight to recent spectacular or personal experiences in assessing the probability of events occurring. This results in an emotional involvement with an investment strategy - if an investor has experienced a winning investment lately, he or she is likely to expect that it will remain so. Once a bubble gets underway, investors' emotional commitment to it continuing steadily rises, thus helping to perpetuate it.
• Overconfidence - people tend to be overconfident in their own investment abilities. This is particularly the case for men.
• Too slow in adjusting expectations - people tend to be overly conservative in adjusting their expectations to new information and do so slowly over time. This partly explains why bubbles and crashes in share markets normally unfold over long periods.
• Selective use of information - people tend to ignore information that conflicts with current views. In other words, they make their own reality. This again helps to perpetuate a bubble once it gets underway.
• Wishful thinking - people tend to require less information to predict a desirable event than an undesirable one. This may partly explain why asset price bubbles normally precede crashes.
• Myopic loss aversion - people tend to dislike losing money more than they like gaining it. Various experiments have found that a potential gain must be twice the potential loss before an investor will consider accepting the risk. An aversion to any loss, particularly in the short term, probably explains why shares traditionally are able to provide a relatively high return (or risk premium) relative to 'safer' assets like cash or government bonds.

Madding crowds

As if individual irrationality is not enough, it tends to get magnified and reinforced by 'crowd psychology'. Investment markets have long been considered as providing examples of crowd psychology at work. Collective behaviour in investment markets requires the presence of several things:

• a means where behaviour can be contagious - mass communication with the proliferation of the financial media both in print and electronic form are a perfect example of this. More than ever, investors are drawing their information from the same sources, which in turn results in an ever increasing correlation of views amongst investors, thus reinforcing trends;
• pressure for conformity - interaction with friends, monthly performance charts, industry standards and benchmarking, all help result in herding amongst investors;
• a precipitating event or displacement that gives rise to a general belief that motivates investor behaviour. The IT revolution of the late 1990s or the growth in China and emerging markets are classic examples of this on the positive side. The demise of Lehman Brothers and related events setting off investor panic is an example of such a displacement on the negative side; and
• a general belief which grows and spreads - eg, share prices can only go up or alternatively, shares are a poor investment - this helps reinforce the trend set off by the initial displacement.

Bubbles, busts

The combination of lapses of logic by individuals in making investment decisions and the magnification of it by crowd psychology go a long way to explaining why speculative surges in asset prices develop (usually after some good news) and how they feed on themselves (as individuals project recent price gains into the future, exercise 'wishful thinking' and receive positive feedback via the media). Of course, this also explains how the whole process goes into reverse once buying is exhausted, often triggered by contrary news to that which drove the rise.

The graphic above, which was developed many years ago by Russell Investments, shows pretty well how investor psychology appears to develop through a market cycle. When times are good, investors move from optimism to excitement, and eventually euphoria as an asset's price - be it shares, housing, gold or whatever - moves higher and higher. So by the time the market tops out, investors are maximum bullish and fully invested. This ultimately sets the scene for a bit of bad news to sooner or later push prices lower. As selling intensifies and prices fall further, investor emotion goes from anxiety to depression, and eventually to capitulation and despondency. By the time the market bottoms out, investors are maximum bearish and out of the market. This then sets the scene for the market to bottom as it only requires a bit of good news (or less bad news as is often the case) to bring back buying, and then the cycle repeats.

This pattern has been repeated time and time again over the years. In the late 1990s, investor psychology became euphoric on enthusiasm for tech stocks. Broad media enthusiasm for shares was highlighted by best selling books such as Dow 36,000 and Dow 100,000. Cracks in the tech boom appeared in March 2000, leading to initial anxiety which eventually gave way to capitulation and despondency in late 2002 and early 2003. By 2007, the focus of investor euphoria had reappeared but was focused on credit, the US housing market and commodities. At the depths of the global financial crisis in early 2009, this again turned to capitulation and despondency with respect to most growth-oriented investments, which in turn helped set the scene for the recovery in investment markets over the last two years as the GFC subsided and economic data started to improve.

There are several points to note from all this. Firstly, confidence and investor psychology do not act in a vacuum. The move from despondency at the bottom of a cycle to euphoria at the top is usually ultimately underpinned by fundamental developments, eg strong economic growth and easy monetary conditions.

Second, at market extremes, confidence is best read in a contrarian fashion - major bull markets do not start when investors are feeling euphoric and major bear markets do not start when they are feeling depressed. The reason is that by the time investor confidence has reached these extremes, all those who wish to buy (or sell) have done so - meaning it only requires a small amount of bad news (or good news) to tip investors back the other way. So extreme low points in investor confidence are often associated with market bottoms, and vice versa for extreme highs. For this reason, many strategists monitor investor sentiment as a guide to when market extremes may have been reached. Currently, short term measures of investor sentiment are around average levels, suggesting no strong reading either way. However, longer term measures suggests that investors are still pretty cautious towards shares, which from a contrarian perspective suggests more upside for shares over time.

Meaning for investors?

There are a number of implications for investors.


1. The first thing investors need to do is recognise that investment markets are not only driven by fundamentals, but also by the often-irrational and erratic behaviour of an unstable crowd of other investors. Investors also need to recognise that not only are investment markets highly unstable, they can also be highly seductive. The key here is to be aware of past market booms and busts, so that when they arise in the future, one does not overreact (piling into unstable bubbles near the top or selling everything during busts and locking in a loss at the bottom).

2. Investors need to recognise their own emotional capabilities. In other words, investors must be aware of how they are influenced by lapses in their own logic and crowd influences. For example, an investor should ask, 'am I highly affected by recent developments (whether positive or negative)? Am I too confident in my own expectations? Can I bear a paper loss?'

3. Investors ought to choose an investment strategy which can withstand inevitable crises whilst remaining consistent with their financial objectives and risk tolerance.

4. Investors should essentially stick to this broad strategy even when surging share prices otherwise tempt them to consider a more aggressive approach, or when plunging values might suck them into a highly defensive approach.

5. Finally, if an investor is tempted to trade, they should do so on a contrarian basis. Buy when the crowd is bearish, sell when it is bullish. Extremes of bullishness often signal market tops, and extremes of bearishness often signal market bottoms. But investors need to recognise contrarian investing is not fool-proof - just because the crowd looks irrationally bullish (or bearish) doesn't mean it can't get more so.

Concluding comments

The bottom line is investment markets are driven by more than just fundamentals. Investor psychology plays a huge role and helps explain why asset prices go through periodic booms and busts. The key point for investors is to be aware of the role of investor psychology and the influence that psychological illusions can have on both the market and themselves.

Finally, some may be thinking that if investment markets are not efficient and prone to swings from irrational pessimism to irrational exuberance, how can we rely on them to best allocate scarce resources throughout the economy? The answer is simple - for all their faults, free capital markets are far better at this task than centralised government bureaucracies.

Greed And Fear - Part 6

Read? Greed And Fear - Part 5

• 2009 was a year of less fear and more greed. It was the year for bulls and also a happy year for buy-and-hold.
• 2010 will be different. It will be a year of fear and greed playing out in the market. It will not be a good year for buy-and-hold. It will be a year for those who have greater guts win. If you don't have strong heart, it is better to avoid this roller-coaster ride in the market.

Greed And Fear - Part 5

Read? Greed And Fear - Part 4

Market trading volume has been low due to World Cup?

So World Cup is over tomorrow and earning reporting season will begin next week it may help to suck in more and more traders into the market to provide higher trading volume and liquidity.

Low market volume due to World Cup or More Fear in the Market? We shall see next week.

More lunch boxes arriving soon?

Greed And Fear - Part 5

http://createwealth8888.blogspot.com/2009/11/greed-and-fear-part-4.html

In  “Trading in the Zone”, Douglas wrote that all trading errors due to Fears.

Four Primary Fears:

1. The fear of being wrong.
2. The fear of losing money.
3. The fear of missing out (on the trade and profits).
4. The fear of leaving money on the table, or giving back open profits.

These fears lead traders to second-guess their trading rules and strategies. They might buy too early as they were afraid  that the market was going to run away without them. And they might sell too soon as they were so worry that the market would snatch their profit, and not waiting for the trade to develop and to hit their set target.

The solution?

1. Have a  system.
2. Have a clear set of rules for entering and exiting trades.
3. Follow your rules!


Have faith in your system and faith in your rules. If your system is a good one you will make money.

So you must follow the rules of your system, instead of reacting to your emotions when deciding whether to enter or exit a trade.

Greed And Fear - Part 4

http://createwealth8888.blogspot.com/2009/10/greed-and-fear-part-3.html

I have this chance to observe how the Greed and Fear action played out in a trader on her trade on Kep Corp.


She has queued to sell at $8.44 and sudden movement of price up and she quickly withdrew her sell order. She was very happy and hoped that Kep Corp could continue to move up.

However, an hour later, when HSI dropped sharply, probably due to stumbling of SSE when the Central Banker may tighten Chinese banks’ capital requirement.

Fear of losing and she pressed the panic Sell button at $8.41.

Guess what, Kep Corp recovered and continue to power up. The reason for more buying interests from BBs probably due to several month of dry spell (no orders announcement) and suddenly out of the blue, it announced 2 orders. The better one is on drill ships which many analysts believe that Kep is unable to compete.

In a long spell of dry season, 1 day of rain may bring hope to the farmers.

How can we probably overcome this Fear and Greed in the market to make better decision?

I am still working hard on it. FA or/and TA for Exit strategy?

Pareto's Law In Investing?

Financial & Investment Dictionary: Pareto's Law

Theory that the pattern of income distribution is constant, historically and geographically, regardless of taxation or welfare policies; also called law of the trivial many and the critical few or 80-20 law. Thus, if 80% of a nation's income will benefit only 20% of the population, the only way to improve the economic lot of the poor is to increase overall output and income levels.


Other applications of the law include the idea that in most business activities a small percentage of the work force produces the major portion of output or that 20% of the customers account for 80% of the dollar volume of sales. The law is attributed to Vilfredo Pareto, an Italian-Swiss engineer and economist (1848-1923).

Pareto is also credited with the concept called Paretian optimum (or optimality) that resources are optimally distributed when an individual cannot move into a better position without putting someone else into a worse position.
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CreateWealth8888:

Pareto's principle can be true in your Portfolio Management. 20% of those stocks (multi-baggers) in your Portfolio are providing 80% of the returns. Likewise, 80% of losses are contributed by 20% of losers.



The rest are small gains and losses here and there; and don't have any serious impact to total or net returns of your Portfolio.

Take note of Pareto Principle and apply them to your Portfolio Management, let the top 20% of winners run; and prevent the top 20% of the losers from creating havoc and cut losses fast.

The Cruel Math of Big Losses - Part 2

http://createwealth8888.blogspot.com/2009/11/cruel-math-of-big-losses.html

Now, you are aware of the potential pain and agony of cruel math of big losses. You really have to do some soul searching within your inner self and answer honestly how much losses you can really tolerate to lose.

In deciding what's best for you without losing your sleep at nights, you may want to consider the following data taken from The Intelligent Asset Allocator: How to Build Your Portfolio to Maximize Returns and Minimize Risk, written by William Bernstein:



 
 

Risks And Diversification

When you have $100K and decide to save it. Do you need to diversify the $100K and put e.g $25K per Fixed Deposit into 4 different banks? Let me know you if knew someone did that.

You don't diversify fixed deposits. Why? Because they are virtually risk free!

You diversify to mitigate risks. When there is no or very low risk, there is no need to diversify. So, understanding what are your risks is the key to how you should diversify to mitigate your risks. It can be very personal, and what works for others may not be suitable for you.

The Investment Risk Pyramid

First, you have to clearly understand the Investment Risk Pyramid

Risk-Reward Concept

This is a general concept related to risk and reward. When you take risk, you expect reward. In theory the higher the risk, the more you should receive for holding the investment, and the lower the risk, the less you should receive. But, some time in the financial world, it may not be actually true, investors were told that Lehman Brothers Minibonds are low risk but ended up with huge losses instead of returns.

So depending on your risk tolerance and see how you should adopt your investment strategy in the Risk Arrow from conservative to very aggressive.

 
It is only after you understand what are your risks, then you can determine your diversification strategies.
 
I know what are my money risks. I use 4 different bank accounts (baskets) to mentally and physically separate them to diversify and mitigate those risks. Each bank account serves its own purpose to meet a specific money objective and its risk profile.

http://createwealth8888.blogspot.com/2009/10/two-bank-accounts-no-you-may-need-four.html

So do I sound silly and look stupid?

Greed And Fear - Part 3

http://createwealth8888.blogspot.com/2009/10/greed-and-fear-part-2.html



Greed and Fear are driving the market sentiment at all time and also the driving force behind the buying and selling decisions of almost all market players - Institutional mangers (BBs), Retail investors, traders and yourself except for those buy and forget.

Stock Market is one of those Complex adaptive systems



Complex adaptive systems are special cases of complex systems. They are complex in that they are diverse and made up of multiple interconnected elements and adaptive in that they have the capacity to change and learn from experience. Simply, it means the Stock Market has a mind of its own.

When the fear falls on the Market, it can become more fearful; and through self-learning and eventually breakdowns.

When the last batch of panic sellers are done, Greed will slowly creep back into the market, and soon every body will rush in to buy. Take a good look at the picture below:




Do you know why you buy and why you sell?

Greed And Fear - Part 2

http://createwealth8888.blogspot.com/2009/10/fear-and-greed-driving-forces-of-stock.html

Here is DOW Worst 1-day % Declines:

19 Oct 1987, -508, -22.6%
28 Oct 1929, -41, -13.5%
18 Dec 1899, -8, -12.0%
29 Oct 1929, -230, -11.7%
05 Oct 1931, -10, -10.7%
29 Sep 2008, -777, -7.0%

When fear takes over it consumes investors, and everything looks so black and drops so fast. Fear can cause investors to painfully sell, take their losses and stay away from the market.

But, sooner or later, Greed slowly takes over when investors see others making money and want to get back in the game before the opportunities get away.

Greed is even more powerful than Fear in the market, and can cause the self feeding actions, the same investors who have sold earlier may become greedier and buy back even higher.

This self-feeding action of Greed can really push the bull market to the new high.

So are you more greedy now or more fearful? Ask yourself and those around you and let me know

Two Bank Accounts? No, You may need Four!

http://sgfinancialfreedom.blogspot.com/2009/10/2-easy-steps-to-build-emergency-fund.html


You actually may need four bank accounts.

1 - For living expenses and GIRO

2 - For Emergency Fund (3 months in conjunction with FD period 6/12 months)

3 - For Investment and Trading

4 - Fixed Deposit (Mid Term Saving)

With the 4 bank accounts, you are absolutely clear on the money movement and transactions and also easier to maintain records tracking by downloading monthly statement from the banks.

Greed?

Mahatma Gandhi once said, “Earth provides enough to satisfy every man’s need, but not every man’s greed.”

Investment Rewards come with Risks, Time and Effort.

If some one promises you return that are a few times better than the current Fixed Deposit rate without having you putting time and effort and little or no risks, and you happily believe there is such investment. Definitely, the Greed has overcome you.

It is just that simple. There is no such thing as little risk, little effort, little time spent and expect a high return over current Fixed Deposit rate.

Fear and Greed - Driving Forces of the Stock Market

By Manshu Verma

Fear and Greed are the two driving forces of any market. Greed inflates prices: gets more and more people to jump in the bandwagon and buy the stock, commodity or tulip bulbs and drive prices to a level where they are no longer sustainable and become a bubble.

When greed overcomes the market; no one talks about fear. Greed completely eclipses out fear and the fact that people usually have a short term memory also does quite a bit of good. In times of bull market rallies, people forget what it was like a few months or few years ago and what it meant to be fearful.

During the real estate bubble, investors forgot about the fear and panic that accompanied the dot com bubble. This time it is different - everyone will tell you. The fact that the market collapsed and crashed just a few years ago doesn't help to keep things in perspective and the market heads for one more collapse.

This is just human psychology, and has nothing to do with the country or even century you are in. The first speculative bubble was recoded during the 1600s in what is now Netherlands. It is recorded that prices reached such a high that at one point - 12 acres of land were offered for one variety of a Tulip bulb!

At that time greed was on its high and had completely eclipsed fear. One reason given by historians for the high prices of tulip bulb contracts was that people expected that there will be a parliamentary decree that will void the smaller contracts of tulip bulbs and limit the risk of the buyer.

During the dot com bubble the greed was fed by the assumption that old economic cycles are not applicable to new technologies and the Internet will completely change our lives.

Whatever be the reasons: when greed grips the market it overshadows fear completely and makes people forget how scared they were just a few years ago.

Past Greed and Future Greed

Fear works in much the same manner, and, when fear grips the market it eclipses future greed and exaggerates past greed.

People have lost a lot of money in the current financial crisis and they are attributing much of it to the greed of Wall Street Bankers, Hedge Fund Managers, Real Estate Brokers and their like.

Everywhere there are cries about how greedy people at Wall Street have ruined the savings of Main Street. Fear has gripped the market and greed is the culprit.

People are not talking about future greed though, not yet in any case. No one is asking - where the next bubble will form?

Markets are gripped with fear and are blaming past greed, but, that completely eclipses out the fact that there will be future greed.

There are a few seasoned investors who are talking about where the next big move is going to come in - green energy, gold, agriculture, emerging markets etc. but their voice has been crowded out by the cries of fearful investors.

Greed and Fear work beautifully in tandem and complement each other perfectly.

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Createwealth8888:

Greed and Fear is your Twin Towers and absolutely very personal and it is only for you to find out how to make it works beautifully in tandem and complement each other perfectly.

Open Mind, Close Mind, Open Door, Close Door

“When one door closes, another opens; but we often look so long and so regretfully upon the closed door that we do not see the one which has opened for us.” - Alexander Graham Bell

Somehow, what Alexander said can be quite true in Investing and Trading.

We must always keep an Open Mind and watch out for Open Doors and quickly move in and stay there till it is time to Close Door. Remember when one door closes, another opens.

In the Market, there will be some open doors that are ready to welcome us.

Don't keep a Close Mind, and thinking when one door closes, there will no open door.

Market Is War - Erupted in 2 Oct 09

Sun Tzu said:

Much computation brings triumph.

Little computation brings defeat.
How much more so with no computation.

"The general who wins the battle makes many calculations in his temple before the battle is fought."

Sun Tzu said:

Those who understand
these fundamentals will win.

Those who don't will be defeated.

During this weekends, you make many calculations on positioning, money and risk management and understand which stocks are fundamentally sound.

Watch out ONLY for tired horses and avoid sick horses. After enough rest, tired horses will be up and running while sick horses can be lying there for a long time.

Understanding Prospect Theory

By Albert Phung

Traditionally, it is believed the net effect of the gains and losses involved with each choice are combined to present an overall evaluation of whether a choice is desirable. Academics tend to use "utility" to describe enjoyment and contend that we prefer instances that maximize our utility.

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However, research has found that we don't actually process information in such a rational way. In 1979, Kahneman and Tversky presented an idea called prospect theory, which contends that people value gains and losses differently, and, as such, will base decisions on perceived gains rather than perceived losses. Thus, if a person were given two equal choices, one expressed in terms of possible gains and the other in possible losses, people would choose the former - even when they achieve the same economic end result.

According to prospect theory, losses have more emotional impact than an equivalent amount of gains. For example, in a traditional way of thinking, the amount of utility gained from receiving $50 should be equal to a situation in which you gained $100 and then lost $50. In both situations, the end result is a net gain of $50.

However, despite the fact that you still end up with a $50 gain in either case, most people view a single gain of $50 more favorably than gaining $100 and then losing $50.

Evidence for Irrational Behavior

Kahneman and Tversky conducted a series of studies in which subjects answered questions that involved making judgments between two monetary decisions that involved prospective losses and gains. For example, the following questions were used in their study:

1. You have $1,000 and you must pick one of the following choices:
   Choice A: You have a 50% chance of gaining $1,000, and a 50% chance of gaining $0.
   Choice B: You have a 100% chance of gaining $500.
   
   
2. You have $2,000 and you must pick one of the following choices:
   Choice A: You have a 50% chance of losing $1,000, and 50% of losing $0.
   Choice B: You have a 100% chance of losing $500.
   
   

If the subjects had answered logically, they would pick either "A" or "B" in both situations. (People choosing "B" would be more risk adverse than those choosing "A"). However, the results of this study showed that an overwhelming majority of people chose "B" for question 1 and "A" for question 2. The implication is that people are willing to settle for a reasonable level of gains (even if they have a reasonable chance of earning more), but are willing to engage in risk-seeking behaviors where they can limit their losses. In other words, losses are weighted more heavily than an equivalent amount of gains.

It is this line of thinking that created the asymmetric value function:

This function is a representation of the difference in utility (amount of pain or joy) that is achieved as a result of a certain amount of gain or loss. It is key to note that not everyone would have a value function that looks exactly like this; this is the general trend. The most evident feature is how a loss creates a greater feeling of pain compared to the joy created by an equivalent gain. For example, the absolute joy felt in finding $50 is a lot less than the absolute pain caused by losing $50.

Consequently, when multiple gain/loss events happen, each event is valued separately and then combined to create a cumulative feeling. For example, according to the value function, if you find $50, but then lose it soon after, this would cause an overall effect of -40 units of utility (finding the $50 causes +10 points of utility (joy), but losing the $50 causes -50 points of utility (pain). To most of us, this makes sense: it is a fair bet that you'd be kicking yourself over losing the $50 that you just found.

Financial Relevance

The prospect theory can be used to explain quite a few illogical financial behaviors. For example, there are people who do not wish to put their money in the bank to earn interest or who refuse to work overtime because they don't want to pay more taxes. Although these people would benefit financially from the additional after-tax income, prospect theory suggests that the benefit (or utility gained) from the extra money is not enough to overcome the feelings of loss incurred by paying taxes.

Prospect theory also explains the occurrence of the disposition effect, which is the tendency for investors to hold on to losing stocks for too long and sell winning stocks too soon. The most logical course of action would be to hold on to winning stocks in order to further gains and to sell losing stocks in order to prevent escalating losses.

When it comes to selling winning stocks prematurely, consider Kahneman and Tversky's study in which people were willing to settle for a lower guaranteed gain of $500 compared to choosing a riskier option that either yields a gain of $1,000 or $0. This explains why investors realize the gains of winning stocks too soon: in each situation, both the subjects in the study and investors seek to cash in on the amount of gains that have already been guaranteed.

The flip side of the coin is investors that hold on to losing stocks for too long. Like the study's subjects, investors are willing to assume a higher level of risk in order to avoid the negative utility of a prospective loss. Unfortunately, many of the losing stocks never recover, and the losses incurred continued to mount, with often disastrous results.

Avoiding the Disposition Effect

It is possible to minimize the disposition effect by using a concept called hedonic framing to change your mental approach.

For example, in situations where you have a choice of thinking of something as one large gain or as a number of smaller gains (such as finding $100 versus finding a $50 bill from two places), thinking of the latter can maximize the amount of positive utility.

For situations where you have a choice of thinking of something as one large loss or as a number of smaller losses (losing $100 versus losing $50 twice), framing the situation as one large loss would create less negative utility because the marginal difference between the amount of pain from combining the losses would be less than the total amount of pain from many smaller losses.

For situations where you have a choice of thinking as something as one large gain with a smaller loss or a situation where you net the two to create a smaller gain ($100 and -$55, versus +$45), you would receive more positive utility from the sole smaller gain.

Finally, for situations where you have a choice of thinking as something as one large loss with a smaller gain or a situation where you have a smaller loss (-$100 and +$55, versus -$45), it would be best to try to frame the situation as separate gains and losses.

Trying these methods of framing your thoughts should make your experience more positive and if used properly, it can help you minimize the dispositional effect.

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CreateWealth8888:

Now, you understand how this Great Bear has impacted the retail investors behaviors and some may have become overly conservative and park excess cash in fixed deposits or money markets. To recover losses from the Bear Market, one has to be in the market to ride the Bull; or may be some are thinking of recovering losses through the property market.

Investing Is Never Ever About The Past

Many investors may be hurt by this Great Bear and still living in the past.

Investing is never ever about the Past. The past is past. It's gone and doesn't really matter anymore.

You may want to seriously review your own investment strategies and then moves on.

Staying too long and too much in CASH may actually hurt you in your future and beware of possible higher inflation rate, and let us hope that history will not repeat itself so soon and we will have enough time to build up some wealth before the next Bear comes. Cheers!

What Is The Consequence Of Making Investment Mistakes That Counts

http://sgmusicwhiz.blogspot.com/2009/09/can-we-afford-to-make-mistakes-in.html

http://fivecentstencents.com/blog/2009/09/10/to-err-is-human-to-learn-is-divine/#more-898

Remember Murphy's law:
"Anything that can go wrong will go wrong."

So someday and somehow we will make one or more very serious investing mistakes and cause us to lose money. It is the consequence of losing this money that counts.

Can we afford to lose this amount of money without waking up in the middle of night and wondering how to get through this crisis?

So does your investment strategy allow you to make a few serious mistakes and still allow you to get back into investing with new capital and hopefully to recover all your losses after learning your mistakes? If it is not, then you can't afford to make any mistakes.

Psychology of Losses in Money

Losing money activates fear and pain in the brain, according to Dr Ben Seymour from the Wellcome Trust Centre for Neuroimaging at University College in London. When research participants lost money through gambling, the area in their brains normally associated with fear and pain was triggered. The same region allows the brain to predict imminent danger and activates defensive actions – leading Dr Seymour to conclude that there’s biological truth behind the clichéd phrase “financial pain.”

The brain’s ancient evolutionary system of motivation, fear, and pain has been hijacked by contemporary financial losses and gains. That is, we want to avoid losing money the same way we want to avoid experiencing pain because fiscal loss and physical pain are connected in our brains. Even just anticipating or thinking about losing money activates that region of our brains (the striatum). This is the psychology of money – or more accurately, the physiology of money.
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CreateWeakth8888:


If you want to participate in the stock market, you will have no choice but to accept the fact that you will at some points in the future encounter real losses or paper losses.

You have to live to overcome this psychology of money or physiology of money so that you will have a less painful investing journey.

Your first trade in a new stock will be the most painful one if you are hit with a paper loss after buying. But, if you have holding power, learn to relax, this paper loss is not going to kill or ruin your financial life.

Market goes up and market crashes down is a normal behavior of the market. If the market allows you to make reasonably good returns on your newest stock, do take it. With the realized profit in your pocket, then wait for opportunity to re-enter this stock again.

Your psychology of paper losses on this second trade will be less painful if the market turns against you. Continue to execute this strategy successfully and you will one day realize that you have overcome psychology of money – or more accurately, the physiology of money.

Fear of missing out??? Fear of losses??? Part 3

http://createwealth8888.blogspot.com/2009/04/fear-of-missing-out-fear-of-losses-part.html<--- Part 2

So what will we have for STI next week?

I will simply be more cautious, but there might be National Day rally. One of the great ironies of the stock market is that more people believe it will go down, the more likely it is to go up. When everyone thinks it go down further and delays buying, then market slowly moves up. Market is weird!