What is Investor Psychology? (2024)

FAQs

What is Investor Psychology? ›

Investor psychology is the study of the emotional and cognitive factors that influence the decision-making process of investors. It refers to the mental and emotional factors that influence an investor's decision-making process when it comes to buying, holding, or selling investments.

A quick search for investing personality types returned a handful of notable results. The most prominent is the CFA Institute's Candidate Body of Knowledge categorizing the four main types by their willingness to take risk — cautious, methodical, spontaneous, and individualist.

You decide not to sell the stock to avoid realizing the loss. If there is another stock with better earnings potential, however, your decision creates an opportunity cost. You pass up the better chance to increase value in the hopes that your original value will be regained.

Psychological Approach

It means that stock prices are influenced by the sentiments about a company in the market. If the investors are having positive sentiments in the market, prices of the stock would appreciate even if the company is not reporting good earnings.

An investor is an individual that puts money into an entity such as a business for a financial return. The main goal of any investor is to minimize risk and maximize return.

These are neuroticism, conscientiousness, agreeableness, extraversion and openness. At the end of the day, the authors conclude, these personality traits all have an influence on client choices about wealth accumulation, and they should be factored into any holistic financial plan.

We like to think we invest rationally, but the field of behavioral finance has shown there are social, emotional and even cognitive factors that can affect our investing decisions. Those factors, also called behavioral biases, can undermine our decision-making ability and impact our long-term success.

Are you an aggressive investor? Your priority is to maximize the growth of your capital. You are willing to accept significant price fluctuations for higher potential returns, and you are able to take on possible losses. You have a long-term investment horizon and you are generally not concerned with liquidity.

For the most part, no. Behavioral finance and investor psychology reveal that despite the assumption of rational actors in mainstream economic models, human beings systematically deviate from this assumed behavior.

How do you develop investment mentality? ›

Developing a wise investment mindset requires patience, discipline, and most importantly, knowledge. It's important to educate yourself on different types of investments, their potential risks and rewards, and how they fit into your overall financial goals.

Investment behavior refers to the occasional purchase of new technological devices or the general adoption of a new technology, whereas habitual behavior refers to routines and practices in the daily energy consumption, such as switching off the computer after work.

Psychological Factors in Investing:

Emotions, biases, and herd behaviour play a crucial role in investment decisions. Self-awareness and emotional intelligence are key to successful investing.

The Intelligent Investor by Benjamin Graham is one of the most renowned books on stock market investing. The book goes into great detail on building a portfolio based on value investing. Warren Buffet has used the book to build his own portfolio and has added his own piece to the 4th edition of the book.

Investors play a crucial role in the success and growth of businesses, particularly startups and emerging ventures. They provide not only the necessary capital but also valuable guidance, expertise, and networks. However, the relationship between a company and its investors goes beyond financial transactions.

Individual investors are individuals investing on their own behalf, and are also called retail investors. Institutional investors are large firms that invest money on behalf of others, and the group includes large organizations with professional analysts.

The majority of successful entrepreneurs predominantly fall within four types: ENTPs, ESTJs, ENTJs, INTJs. But chances are, you have already known what it is. It's so popular, an average of 2.5 million people takes it every year.

Many investment bankers are Type A personalities, which means they are ambitious and driven.

INTJ personality types are most frequently observed as successful traders due to their innate personality types. One study found that 81% of INTJs were profitable, far higher than a sample of traders overall, which is closer to 10% profitable, not filtered for personality.