The novice trader makes knee-jerk decisions that affect his investments. Just as an athlete achieves better results when he follows his coach's instructions, trading psychology (the study of the psychological aspects that influence the behavior of traders) helps novice investors progress faster and safer and achieve better results.
In a report published by the Spanish website "Finantas Claras y Faithles", author Rosa Estan says that relying on emotion in investment activity causes a high percentage of traders to withdraw from the market during the first months of launching their activity. Beginners' desire to make money quickly leads to many mistakes that professional investors exploit.
In fact, excessive optimism leads to a false sense of control over the market, and this way of thinking is completely illogical because financial markets are characterized by constant fluctuations and are subject to many political and economic factors, according to the author.
The fear of loss, in turn, is considered one of the causes of emotional and impulsive behavior, which prompts the novice trader to make uncalculated decisions that harm his investments.
Does cognitive bias lead to investment failure?
The author confirms that most irrational decisions or “deviations” in human behavior are due to false information that we store in our brains, and this in turn applies to economic decisions.
Behavioral economics has been interested in studying this issue, and it has been scientifically proven, through brain examination and physiological response tests such as blood pressure, heart rate changes, hand sweating, dry mouth, etc., that humans respond to loss twice as much as gain.
When an investor loses in the stock market, he feels bitterness that stimulates the desire to “revenge” and compensate for the money he lost in any way, but what happens is that the market does not care at all about anyone who lost his money. When one investor loses, another investor wins. But this can lead the investor into many mistakes, as he - as the author says - sided with the “herd” over and over again, and does what most people do without analyzing the market well.
For example, some people buy stocks when the market rebounds and sell them once it declines, but this bias behind economic “bubbles” and speculation, as happened in the real estate market in Spain in 1997 and in the United States in 2008, often has dramatic consequences for thousands of people. Families and businesses.
An example of cognitive bias in investment behavior, according to the author, is what is known as the framing effect, that is, the tendency to lend credibility to the opinions of people in high political and economic positions.
According to the author, the novice investor must be aware of the effect of cognitive bias on his behavior, and be careful not to base his decisions on news, impressions, and officials’ statements.
The risks of over-trading and not stopping losses
The author believes that excessive trading is one of the serious mistakes that novice investors make, as they imagine at one moment that they are completely in control of the market, and this is not true at all.
Also, not making the decision to stop in a timely manner when heavy losses occur is like - from her point of view - walking on a tight rope at high heights without any protection.
The author believes that the first rule that a novice investor must adhere to is to protect his money by avoiding excessive trading, and not taking risks to compensate for losses.
Controlling emotions and coping with stress
In order to succeed in investment activity in the medium and long term, the author says that the novice investor must know well how the brain works by familiarizing himself with the principles of neuroeconomics to avoid emotional and hasty decisions.
He must also treat trading as an investment “tool” through which he can achieve fixed profits over time, and he may also lose part of his money.
The novice investor must have good knowledge of technical analysis and money management, focus on his goals, control his emotions, and have a lot of discipline. In this case, the investor can succeed in improving his financial situation and achieving success.
