Introduction: The psychology of poor investment decisions
The modern day investors eye the option of investing in the stocks and other modes of investments as an effective alternative to the savings they are unable to maintain with their incomes. As a result, the notions of overconfidence and optimism come into play which affects their psychology in terms of making poor decisions. Generally, the overconfidence about one’s knowledge about being completely aware of the stock market investment makes people inclined towards excessive trading. They end up investing into more irrational stock options than what they ought to do just because their psychology of overestimating their knowledge about the stock investment strategy propels them to do so. Similarly, the psychology behind excessive investment into newly introduced or under-functioning companies is generally backed up by the optimism that there will be an assured future profitability via the stock investments which they made (Bazerman & Moore, 2012). The psychology of overconfidence and optimism overlap to influence the rational investment decisions toward being poor ones and consequently, investors start denying the random nature of stock market profitability patterns.
Active trading: The underlying rationale of investors
Active traders are those online stock market investors who tend to minimize their investment costs by eliminating the brokerage and involve in ‘day-trading’ activities to capitalize on the short term prize gains (Bazerman & Moore, 2012). The psychology behind short-term gains via day-trading is generally based on overconfidence that the end of day transactions can always reap more benefits than the conventional buy-hold investment strategy of long-term investors. Thus, the optimism in their active trading pursuits results in huge fluctuations in the stock prices and disturbs the stability of price movements in the stock market.
Conclusion: Action steps for rational investment decisions
There are some commonly committed mistakes in the investment decisions that need to be avoided to prepare a strong foothold in one’s investment decisions. There should be clarity regarding the goals of investment into the minds of the investors. One should be clear whether he wants to be a long term investor with the market-oriented buy-hold strategy which ensures better profitability than the fleeting day-trading practices which rely on the short terms fluctuations in stock prices (Bazerman & Moore, 2012). Also, all the investment decisions should be made under the consideration that there is no definite mode of predicting the stock market trends and it is not rational to be overconfident and optimistic about one’s judgment in this regard.
References
Bazerman, M. H., & Moore, D. A. (2012). Judgment in Managerial Decision Making. 8th Ed. London, MA: John Wiley & Sons: 163-173. Print.
