financial decision making : a bit of unsubstantiated psychology

My first post, working in partnership with the Original Poster for INNOWS, so please forgive me. Also, it’s going to be in English, yes.

What is the optimal psychological state the allows for sound financial decision making while betting on the stock market? Well, here are some conjectures. I would like to think that the well-intended players of the financial stock market are always making sound financial decisions when they are selling and buying. However, this sort of rational decision making has long been pushed aside from our discourse to a more widespread acceptance of our irrationality. In a sense, we could say that the financial stock market balances the divide between sellers and buyers largely due to such irrationality (i.e., the room for error). Indeed, if there was no one to sell, then how would any one buy? Yes, money is important – but it would be a narrow view to disregard the differentiating values that the diversity of our global population nurtures as pillars in their individual lives and respective communities. In other words, irrationality with respect to financecould well be rationality with respect to value X. Money, finance – is one of these variable values XYZ. A lot of the times, it is difficult to harmonize and synchronize the desire to uphold various values simultaneously.

So this amateur investigation begins: could a psychological perspective help us make more sound financial decisions? But wait – let us first discuss several irrational factors in our psychology that impair our financial decision making.

Confirmation Bias 

There is a lot of data out there. The data will support nearly anything.

Optimism Bias 

Or, the entrepreneur’s spirit. This gives you the illusion of control – when it might be more accurate to think that one is synchronizing to the ups-and-downs of the financial market.

Over/Under-Confidence In Predictions 

Usually, experts who are “mid-range” confident make the most accurate predictions in future markets.

Mistaken Beliefs 

Or, illusory correlations. The mind, being susceptible to phenomena like psychological priming, will most likely confuse what seems often plausible and what is statistically  true.

Risk Aversion 

The bad things are more salient to the psyche than the good things – which is probably a good thing – but every gambler knows the tight relationship between big risks and big returns. This is not to say one should be reckless; rather it is a question of keeping one’s analytical cool in the face of risk.

Mental Rigidity 

Or, mental fixation. Chances are that the circumstances will change before one can fully figure what’s going on exactly.

 

Again, apologies for lack of substantive evidence. Questions can be forwarded to jaewoongshin91@gmail.com

 

 

 

 

Works Cited.

Harvard Business Review March 2016 Issue

Hilton, Denis J. (2001). The psychology of financial decision-making: applications to trading, dealing and investment analysis. Journal of Psychology and Financial Markets 2(1): pp.37-53

Kahneman, Daniel; Tversky, Amos (1979). “Prospect Theory: An Analysis of Decision under Risk” (PDF). Econometrica 47 (2): 263. doi:10.2307/1914185.ISSN 0012-968

Kahneman, Daniel. Thinking, Fast and Slow. New York: Farrar, Straus and Giroux, 2011.