It is fascinating to consider the psychology of investing. There are many behavioural traps that investors could find themselves falling into during times of market volatility, when knee jerk reactions can take hold.
One example being ‘the anchoring trap’, which is where investors rely too much on their perceptions of an investment, which could be totally incorrect, rather than being flexible in their thinking and responsive to new data.
Separating emotions from market reaction and investment selection is a whole different challenge. It can be hard to manage our impulses when we see markets fluctuate and we can easily underestimate the risks associated with investments. These are just a couple of reasons why investors sometimes make poor decisions based on emotion, which can result in financial loss.
Red flag to a bull
Another added complication has been highlighted by an interesting new study1 which shows that if financial information is presented in red, it tends to make people more pessimistic about the market than presenting the same facts in blue or black. It seems that using the colour red to represent financial data, influences individuals’ risk preferences, expectations of future stock returns and trading decisions. Such effects are not present in those who are colour blind and are muted in China, where red represents prosperity.
Assistant Professor of Finance at the University of Kansas, William Bazley, who undertook the research, commented on the findings, “The use of colour could lead to investors avoiding the platform or delaying important financial decisions, which could have deleterious long-term consequences. In Western cultures, conditioning of red colour and experiences start in early schooling as students receive feedback regarding academic errors in red. Red is associated with alarms and stop signs that convey danger and command enhanced attention.”
The good news is that having your finances and portfolio managed for you is one effective way you can avoid these potential behavioural pitfalls. You can rely on us to make informed, consistent investment decisions, not based on emotion but on a robust, objective and disciplined process. We take the time to understand your objectives, apply a rigorous process and advise you on the strategies and products most appropriate for you.
1The University of Kansas, 2021
The value of investments and income from them may go down. You may not get back the original amount invested. A pension is a long-term investment. The fund value may fluctuate and can go down. Your eventual income may depend on the size of the fund at retirement, future interest rates and tax legislation.