How to overcome human weaknesses in investment? This principle is explained clearly! Many brothers know that they cannot chase after the rise or fall, but when they see a constantly rising market, they are afraid of missing out on good opportunities and cannot help but follow suit, resulting in being trapped; Seeing that the stocks/tokens you hold have fallen, even if the fundamentals are not a problem, you just can't hold onto them and panic and sell them. Why are we easily manipulated by human weaknesses in investment? Making irrational decisions leading to losses? 01/Behavioral Finance Research on Investor Psychology The premise of classical finance is the assumption of "rational people", which assumes that investors are rational and their behavior is based on rational analysis in order to achieve the most favorable results for themselves. Behavioral finance, on the other hand, introduces the research results of psychology within the framework of classical finance. It believes that investors are not always in a rational state, and their behavior does not always consider the optimal outcome after considering the pros and cons. It attempts to explain the phenomena that occur in financial markets from the perspective of human psychological and behavioral biases, that is, from an irrational perspective, especially those abnormal phenomena that cannot be explained within a rational framework. This kind of research promotes the further development of finance and also brings the influence of investor psychology on investment decisions into people's vision. In fact, if all investors are rational, the rise and fall of the market and stocks will definitely reflect the true situation of the company truthfully, and there will be no sharp decline or sharp rise. However, we will find that it is common for many stocks to rise or fall by 10% in a day, but their fundamentals will not improve or deteriorate by 10% in a day. This indicates that investors are often irrational, which affects their trading behavior and subsequently impacts the rise and fall of stock prices and market fluctuations. For investors, we need to recognize and overcome the negative impact of deep-rooted psychological factors on investment behavior, and achieve rational investment in order to obtain higher returns and reduce losses. Next, we will use some examples to further illustrate. 02/Some Common Investment Psychology Misconceptions Case 1: Assuming you have made a 5% investment profit this year, when chatting with friend A, you find that he not only did not make a profit, but also lost 10%. You will feel that your investment ability is really good, you have made a lot, and you are very satisfied; The next day, you meet your friend B and he excitedly tells you that he earned 10% by buying stocks and wants to treat you to a meal. At this point, you may wonder how you earned so little and how B did it? In fact, in both of these scenarios, your earnings have not changed, what has changed is the reference point, so your mood is different. This is known as the "anchoring effect" in behavioral finance In investment, people receive feedback from various sources and give the target an "anchor" price, which often affects their investment decisions. But rational investors should abandon the "anchor" and conduct comprehensive analysis based on the objective situation of the investment target, such as fundamentals, valuation, industry cycle, and other factors. Case 2: If you find 100 yuan and feel lucky, but soon lose another 100 yuan, will you still feel lucky? I'm afraid not, but it will be very uncomfortable, feeling like I'm too unlucky. In fact, according to the expected benefit theory, the amount of money picked up and dropped is the same, and the utility does not increase or decrease. But people are often influenced by a loss averse mentality, naturally averse to loss. The pain caused by loss is much greater than the pleasure brought by the same amount of income, which leads to the above psychological manifestations. In investment, affected by loss aversion, people tend to invest in products with lower risk, such as treasury bond, deposits, and bond bases. Although the volatility of investment is low, stocks with high returns and volatility will be excluded. In addition, there are sometimes misconceptions about whether the risk of the target is high or low. For example, investing in commercial properties, many people believe that the risk is low, but in fact, more than 80% of commercial properties in Chinese cities are surplus. I wonder if you have seen news of top-level commercial properties going bankrupt, and even Hangzhou's "Ganglong City" with top-notch supporting facilities and transportation cannot make profits and has entered the legal auction market. For example, P2P products that once boasted of "guaranteed capital and interest" were widely overlooked for their hidden risks before the storm. In investment, people are influenced by a loss averse mentality, and when faced with certain losses, they may become more inclined to gamble. Anyway, they will lose money, so it's better to take a gamble; And when faced with a confirmed income, I think about quickly putting it in my bag. Many investors hold a pile of stocks of poor performing companies in their hands, but are reluctant to sell them because they are betting on the situation of "future rise, salted fish turning over". However, the more they hold, the more they fall, and the less they want to sell. In this situation, the correct approach is actually to overcome the gambling nature. Once it is found that this is not a good company, sell it resolutely and stop losses in a timely manner. There are also many investors who can't hold onto profitable BTC, and once they make 5% or 10%, they quickly sell them to cash in the profits and settle for safety. However, a good target is one that is on the rise in the long run, and it is likely that after you sell it, if it continues to rise, you will not have the courage to buy again. Through the above examples, have you noticed that human weaknesses can have a significant impact on investment, making it easy for investors to make irrational decisions, resulting in losses or reduced returns. Through the research results of behavioral finance, people can understand and judge their investment psychology, and strive to overcome these weaknesses to make their investment decisions more rational. I recommend some good books to my brothers. Interested students can read them: "Thinking, Fast and Slow", "Wrong Behavior", "Money Psychology", "Beyond Fear and Greed", "Financial Psychology". Encouragement together!