The Psychology of Fear and Greed in Stock Market Investing 2024

Herd Mentality Definition:

This term describes investors’ propensity to mimic the behavior of a bigger group, frequently motivated by a desire to fit in or a fear of missing out (FOMO).

Impact: Herd mentality can cause market bubbles or crashes in the Philippines. For instance, many Filipino investors rush to buy stocks during strong market gains, pushing prices higher without considering the underlying fundamentals. On the other hand, panic sales during market downturns may make declines worse.

Overconfidence Bias:

This refers to investors’ propensity to exaggerate their expertise, aptitude, or capacity for predicting changes in the market.

Impact: Many Filipino investors, particularly new ones, may need more confidence, which could result in excessive trading and risk-taking. They may need to pay more attention to good investing advice or market cues, which could lead to significant losses.

Anchoring Definition:

Anchoring is basing investing judgments on particular facts, including historical stock values.

Impact: Investors in the Philippine market may base their expectations on the high stock prices of the past, creating irrational expectations for future success. For instance, investors may hang onto a stock that was once valued at PHP 100 but has dropped to PHP 70 in the hopes that it will eventually rise to PHP 100 despite the state of the market.

Definition of Loss Aversion:

Loss aversion is the inclination to act risk-averse by avoiding losses rather than obtaining comparable rewards.

Impact: Filipino investors may hold onto losing equities for an extended period to avoid suffering a loss. This may impede the growth of their portfolio by preventing them from reallocating their investments to more lucrative prospects.

Recency Bias Definition:

Recency bias is the propensity to prioritize decisions based on recent events.

Impact: Recency bias can cause investors to overreact to short-term market swings in the erratic Philippine stock market. For example, investors may grow unduly hopeful and raise their investments following market gains, whereas recent losses may induce excessive pessimism and selling.

Confirmation Bias Definition:

The propensity to look for, analyze, and retain evidence that supports one’s beliefs is known as confirmation bias.

Impact: Filipino investors may look for facts confirming their decisions while disregarding conflicting information when making investment decisions. As a result, bad investment choices may be made based on inaccurate or biased information.

Definition of Regret Aversion:

Regret aversion is the propensity to avoid making choices that cause regret.

Impact: Fear of future regret may cause investors in the Philippines to delay selling losing stocks or to postpone investing in fresh chances. This conduct may raise exposure to losing equities and reduce investment results.

Definition of Mental Accounting:

Mental accounting entails treating money differently depending on its source or planned use.

Impact: Rather than using a comprehensive portfolio approach, Filipino investors may divide their money into several accounts (savings, investments, and emergency funds) and base their decisions on these mental accounts. This may result in resource misallocation and less-than-ideal investment decisions.

Techniques for Reducing Psychological Biases

Investing across various asset classes can mitigate the effects of sector or stock-specific biases. This is known as diversification.

• Education: To identify and combat biases and stay current on behavioral finance and market principles.
• Professional Advice: Consult with financial professionals for advice. They may offer unbiased opinions and steer clear of emotionally motivated choices.
• Establishing Guidelines: To lessen emotions’ impact on decision-making, clearly define investing guidelines and criteria.
• Introspective Techniques: Review and consider previous investing choices regularly to help you learn from your mistakes and behave better in the future.

In Summary

Just as important as the mechanical and financial aspects of stock market investment are the psychological factors. Understanding and controlling these psychological biases might help investors make more sane judgments and achieve better financial results in the Philippine setting. Filipino investors can improve their investing performance by devising techniques to counteract the effects of herd mentality, overconfidence, anchoring, loss aversion, recency bias, confirmation bias, regret aversion, and mental accounting.

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A multi-award-winning blogger and advocate for OFWs and investment literacy; recipient of the Mass Media Advocacy Award, Philippine Expat Blog Award, and Most Outstanding Balikbayan Award. Her first book, The Global Filipino Bloggers OFW Edition, was launched at the Philippine Embassy in Kuwait. A certified Registered Financial Planner of the Philippines specializing in the Stock Market. A recognized author of the National Book Development Board of the Philippines. Co-founder of Teachers Specialist Organization in Kuwait (TSOK) and Filipino Bloggers in Kuwait (FBK). An international member of writing and poetry. Published more than 10 books.  Read more: About DiaryNiGracia