by The biggest factor that decides the success or failure in the stock market is human psychology so I have identified 5 Investing Psychology Points why people make so many mistakes in the stock market.
5 Investing Psychology Points
5 Investing Psychology Points are as follows:
1. Thrill people
The first reason is thrill people need thrill folks to read it carefully and understand this human psychology if I give you two options of investment. first is a nifty 50 index point that can give you an average of 10 % annual return for the next 10 years versus an active mutual fund that can either give 15% return or can also give five percent return.
what would you choose majority of people would go with an active mutual fund because if you know an average 10 percent return then there is no thrill on the other side.
Even if there is a slight chance of 15return then you want to take that chance even though there is a huge downward risk this is the reason.
Why index funds are not so popular in India?
On the other side if I tell you that a stock can give you an average of 20 % returns for the next 10 years versus a stock that can either give 100 returns or can also give a negative return then the majority of people would go with option two.
I love to understand human trading psychology in fact, I want to share a brilliant story of how google pay became such a hit in India when Google Pay entered India people used to transact with Paytm.
So earlier Paytm used to give rupees 100 or rupees 200 as cashback which can be used in another transaction but google pay did something extraordinary do you know what was that the problem with Paytm cashback was that people already knew the amount they would receive.
There was no thrill google pay introduced a scratch card system so you make the payment and get a scratch card now this was a billion-dollar idea since people didn’t know about the cashback they would receive it created a thrill in their minds and google pay started with giving good cashback.
If someone makes a payment of rupees 500 and got a scratch card with a cashback of rupees 100 the person was thrilled he did not expect this, this releases dopamine in the body which is the hormone responsible for happiness.
Dopamine is also known as a feel-good hormone so he started sharing his google experience with friends and all over social media instantly google pay became a hit.
In fact, this strategy was so brilliant that it would cost google pay less than Paytm cashback because later google pay reduced the cashback on scratch cards, and many times the scratch card would show better luck next time still there was a thrill.
If you are wondering google pay guys must be a genius this concept is nothing new we humans have always been thrilled by these scratch cards and hence the concept of the lottery has been prevailing in our society for hundreds of years.
It is just that google pay has made an online version of it later Paytm also followed the same strategy in fact this dopamine is the main reason why people are glued to social media.
The urge to get instant gratification with someone liking your photo anyways let’s not divert from our topic if you need thrill please visit goa or vegas.
“Real investing is boring it is like watching paint getting dry or watching grass grow”.
Greed
- The next reason is greed this is again a big problem, greed is the reason people end up investing a huge amount of money when the market is at the top.
- Greed is the reason people end up borrowing money to invest in the stock market.
- Greed is the reason people end up investing in penny stock. Greed is the reason people end up doing day trading and fno.
- Greed is the big reason why people end up losing money.
Lack of patience and discipline
- The next reason is lack of patience and discipline this statement sums up the mentality of the majority of investors everybody wants to get rich but nobody wants to get rich slowly.
- if you study warren buffet, he became a billionaire at the age of 56 but the majority of people due to lack of patience in investment.
- In fact, if they invest in a great stock or mutual fund and it doesn’t give return in next few months they end up selling it because they simply don’t have the patience.
Discipline
- Discipline to invest systematically at various levels in spite of market volatility discipline to stay invested in the market.
- It is not easy and the majority of people lack discipline.
Pressure
- People can’t handle the pressure friends you need a lot of conviction to go against the wind and stay invested when the market falls.
- In fact, invest even more during the fall but conviction comes only from the knowledge that brings us to the final root cause which is lack of knowledge.
Lack of knowledge
This is again a major culprit in people ending up losing money, unfortunately.
Money management is not a part of the school curriculum in India nobody teaches it, nobody likes to discuss it. no wonder every year millions of people in India end up falling into various financial traps and destroy their financial life.
I wish to spread the knowledge and educate every Indian about money management so that they don’t fall into any financial trap hence I have created a complete course on everything about money management friends even I am not perfect sometimes I also get carried away with good stock available at expensive valuation.
Conclusion
If I know that a stock is really good with great management great financial and great future then is sometimes end up buying the stock even if the stock is available at a super expensive valuation although I make sure that I don’t buy a lot. Sometimes I also get impatient when the stock I invested in does not show a good return then I tell myself keep patience believe in the power of compounding do not get carried away.
Sometimes I also find it difficult to handle the pressure when I invest in a good stock and the stock price tank then again I remind myself you invested after the research now don’t lose your conviction.
In fact, if the share price has fallen then invest more friends this knowledge is a result of years of research of reading great books blogs, and discussions with people I have tried to put it, in a nutshell, I hope you will appreciate.
One should follow the Risk Management, Money Management, and Fear and Greed concept of the market to avoid big losses.
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Looking forward to learn a lot from you sir
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