Behavioral Mistakes And Risk – The importance of keeping emotions and impulses away from your investments

No matter how disciplined you are as an investor, people tend to make financial calls that are marked by behavioral biases. These biases, or behavioral risks and mistakes, make them act on emotion and impulse and commit mistakes while processing the information.

As a small private investor, you are at liberty to invest in whatever you want, both with respect to ethical issues as well as an asset class. For example, if you think Facebook will perform better than Google, then you should certainly be investing in Facebook.

Now let’s suppose that you have taken on a bet that separates you from the S&P 500 index. By omitting Google which is valued higher than Facebook in the index, you can get better returns if Facebook goes past Google. But this could also be a blunder if you make a mistake.

If you believe that you can do better than the S&P 500 index, you must trust yourself and your decision. But even if you invest passively, you must trust yourself. Instead of believing everything that the market reports, take the statements in the media with a healthy dose of skepticism.

Since humans tend to focus more on the current news than the older news, we are more likely to make impulsive decisions that may not be too smart in the long run.

People often allow themselves to be influenced by what they read or hear, which often works against the primary purpose of gathering as much information as possible. While the short-term prices are generally influenced by the economy, the company’s pricing is also affected by a few catalysts.

Therefore, much of the information doesn’t necessarily lead to better decisions. Thus, you don’t merely waste time looking for information but also run the risk of making financial calls based on non-course information.

Therefore, it’s better to concentrate on selecting the right stocks instead of worrying about the market since you don’t have any control over the market in any case.