A psychological trap can lead an investor in the wrong direction. It should be definitely avoided and should be known by every investor out there. Moreover, the stock market is an amazing and exciting place where you can easily get driven by emotions. Here prices rise and dip every moment throughout the day that needs the investor to modify the plan. Additionally, even the best and experienced investors are indeed led by emotions sometimes that pull them into psychological traps. If you want yourself to be safe from these traps first you need to know them in order to avoid them.
Here are the Psychological Traps that Every Investor Should Avoid to be a smart investor.
Superiority Trap is the one that takes many people into its trap and is the most common type. In this psychological trap, the investor thinks he can investor better than any expert or even outsmart the market investors. Just being well-educated about the market does not mean you cannot make any losses. The superiority trap avoids the investor to take advice from industry experts or stock brokers. Moreover, this bias is self-destructive as the investor has a bigger ego than the will to earn the profit.
Many investors who fall into this trap incur a huge loss with thinking that they are better than the rest of them. Additionally, people are easy prey to this trap as a person’s emotions take over him when they see plenty of opportunities in the market. A professor of finance who has extreme knowledge of the markets but no experience and thinks he needs no one’s advice might suffer loss.
The relativity Trap is the one that can lead you to your destruction. A trap in which your psychological emotions take over you on the advice of some known, friends, colleagues, etc. Moreover, you must be having a different set of circumstances like inheritance, career, family, etc. You should aware of what people are thinking around you but you should not trade on their advice. You should have your opinion and trade according to your terms not what others say.
The confirmation Trap leads an investor to seek confirmation from people who are already making mistakes. By someone’s wrong advice you can incur a huge loss and this trap should be avoided. Moreover, you should receive advice from fresh sources than going to seek advice from any person who gave bad advice already. Going to seek confirmation may be comforting in the short run but it is self-delusion.
Anchoring trap is a trap where we rely on what we think of the decision originally. If your decision is not having any context it will make no sense and get you no profit. For example, if you were to bet at a boxing match and you bet over the fighter who punches the most in the last five fights but you are not looking whether he wins or not at the end. This bias will lead to a misconception and from here your emotions will take the driver's seat. Moreover, this trap comes with a sign “Don’t jump to the conclusion”. Do proper stock research, take proper expert advice, look at recent news, and then a decision.
Sunk Cost Trap is where an investor holds onto a bad stock just to recover the past losses. For example, a stock you purchased in 1999 that made you a lot of loss and even to reach near break-even will take a lot of time. You are waiting for the stock to suddenly perform well which is not going to happen. It is better to detach yourself from such stock as soon as possible without having any second thoughts about it. Moreover, the stock market is not about attaching yourself to a bad stock, it will just make things worse and worse.
A blindness trap is a guilt trap that avoids you getting rid of a stock and facing the loss. It is when you know the stock you own is at a downfall and eventually you are going to face losses but you want to avoid the reality. When you know deep down that the stock you have is facing some scandal issues and you avoid the news. You avoid this news as you want to ignore the reality and are too scared to face it. These circumstances cause the blinder effect that just brings your doom closer and closer.
Pseudo-Certainty Trap is a trap where it all depends on the perception of risk by any investor. Moreover, when an investor is seeing his portfolio will have positive returns in near future, he will limit his risk exposure as he is already getting what he wants. On the contrary, an investor who is not seeing any profit but the loss in the future, he will take more risk in order to convert that loss into profit.
The irrational Exuberance Trap is when an investor thinks the past and future are the same. They avoid thinking about uncertainty in the market which will in reality never vanish. The market will always behave in an unexpected way with many ups and downs with a lot of surprises. Additionally, when overconfidence enters the picture the investor is already on the path of self-destruction. Past is never equal to future at least not in the stock market.
Human psychology is the strongest enemy of a human. There are some big mistakes that investors incur again and again expecting a different outcome every time. Moreover, it is very easy to trade according to these traps but it will lead you to extreme losses. An investor trades to earn profit and not to let the temptations get over his decision-making. Additionally, wrong perceptions, delusions, avoiding losses, seeking comfort, ignoring reality will not help at all. Always take your own decision with great research and expert advice.
S. Vishwa is a web marketing analyst in a fintech organisation. Have 6+ years of web marketing experience and love to write about business management, finance and Internet of things.