While there are many characteristics of a good investor, one is understanding your emotions and human tendencies. And on that note, even before you start looking at the stock market, I’d like to help you look at human tendencies and how they relate to investing, because they play more a role than you think.
The study of human behavior may teach you things you do not realize about yourself; things that once mastered, you’ll be able to apply in a surprisingly large number of situations, even outside of investing.
Only after understanding your emotional responses to market movements and your natural inclinations should you move into the next phase: Analyzing and investing in companies. That’s what I hope to do — to show you the difference between subjective and objective decision making with investments and how, statistically, you are more likely to earn a higher return if you can invest objectively.
There is a concept
known as prospect theory, which was originally presented by Kahneman and Tversky in 1979. It holds that people do not respond equally to gains and losses. That is, they do not enjoy gains in the same magnitude that they dislike losses. Losses, the study indicated, are typically felt in a greater magnitude.