psychology of an investor

8/8/2019 Psychology of an Investor

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1 INTRODUCTION

2 THEORETICAL PERSPECTIVES

3 APPLICATIONS

4 CURRENT RELEVANCE

5 LEARNINGS AND CONCLUSIONS

AGENDA


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Who is an Investor ?

The Guy who putsmoney into investment

products with an

expectation of financial

gains

Looking to maximize

gains and minimize risks


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Investor Psychology

Social

Cognitive

Emotional

Economic

Decisions

Market

Prices

Market

Returns

Resource

Allocation


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THEORETICAL PERSPECTIVES

Prospect Theory

People respond differently to different situations depending on the context Investors become considerably more distressed at the prospect of losses than

they are made happy by equivalent gains

Investors become more of risk takers when faced with sure losses

Regret Theory A persons emotional reaction to having made an error of judgment

Applicable when - Buying a stock that has gone down; Not buying one they

considered and which has subsequently gone up and when conventional

wisdom is not followed

Anchoring

A behaviour in which, in the absence of better information, investors assume

current prices are about right

In a bull market, each new high is 'anchored' by its closeness to the last

record, and more distant history increasingly becomes an irrelevance

Too much weight is given to recent information


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Over-Reaction

A behaviour which is the consequence of investors putting too much

weight on recent good news and hence showing overconfidence

Investors tend to become more optimistic when the market goes up.And Prices rise too much on good news

Bandwagon Effect

The tendency to believe certain outcomes because others believethe same

Keynesian Beauty Contest Model

Buying a particular share because others are buying it


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Biases Systematic errors of judgment such as relying on intuition

rather than on the rules of the market

Optimism

Conservatism

OverConfidence

Short TermFocus

Hindsight Confirmation


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APPLICATIONS

FinancialAnalysts

Research indicates thatprofessional analysts are

remarkably bad atforecasting the earnings

growth of individualcompanies

They fail because they liketo stay close to the

crowd; and their forecasts

tend to extrapolate fromrecent past performance,which is very often a poor

guide to the future

InstitutionalInvestors

May be reluctant to take

minimal risk of investingin a stock (whose

probability of successhigh) out of the fear ofbeing fired if the stockdoes not perform well

Similarly, agents tend tofavour well-known and

popular companies

because they are lesslikely to be fired if they

underperform

StockAnalysts

Stock analysts as a group

engage in herd behaviourin part because they are

constantly evaluatedagainst their peers

While forecasting, younganalysts try to go with

the crowd more than the

older ones. This isprobably because a few

notable failures candestroy reputation


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THE INVESTOR PSYCHOLOGY CYCLE


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According to the cycle, a bull market typically starts when amarket is at a low and investors scorn stocksContempt

They try to decide whether what they have left should beinvested in a safe haven such as a money market fund. They haveburnt their fingers with stocks and vow never to invest again

Doubt and

Suspicion

The market then gradually starts showing signs of recovery. Mostinvestors remain cautious, but prudent investors are alreadydrooling at the possibility of profit

Caution

As stock prices rise, investors feeling of mistrust changes to

confidence and ultimately to enthusiasm. Most investors startbuying their stocks at this stageConfidence

Prudent investors are already starting to take profits and get outof the stock market, because they realize that the bull market iscoming to an end

Enthusiasm



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Investors enthusiasm is followed by greed, which is oftenaccompanied by numerous IPOs on the stock market

Greed andConviction

Investors look beyond unsustainably high price-earnings ratiosIndifference

As the market declines, investors show a lack or interest thatquickly turns to dismissalDismissal

Then they reach the denial stage where they regularly affirmtheir belief that the market definitely cannot fall any furtherDenial

Concern starts to take a hold and fear, panic and despair soonfollow. Investors again start scorning the market and once againthey vow never to invest in stocks again

Fear, Panic and

Contempt



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THE SATYAM STORY HUGE FLUCTUATIONS

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Highs and Lows

High Price

Low Price

Satyams decision

to buy Maytasproperties

World Bank bars

Satyam for 8

years

Ramalinga Raju admits

fudging of Satyams

accounts to the tune of

Rs 5000 cr


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0

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100

150

200

250

300

350

I

n

M

i

l

l

i

o

n

s

Total Traded Quantity

Total Traded Quantity

Highest

traded

quantity ever

THE SATYAM STORY HUGE FLUCTUATIONS


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CURRENT RELEVANCE THE SATYAM STORY

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10

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60

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Close Price

Close Price

SEBI eases buyout

rules

Share Price Rs.

57

Tech Mahindra

won the bid for

Satyam

Share Price Rs.

43


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LEARNINGS & CONCLUSIONS

How is the Economy

Behaving ?

How has the InvestorMatured and How is

he behaving now ?

psychology of an investor

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