Economics normally believe that humans are perfect rational beings, but the works of Robert Shiller, Daniel Kahneman ammas travel sky, Richard Taylor have shown that humans are not rational beings, they have their own biases and heuristics.
These biases and heuristics normally affect the way humans behave. And this has a profound impact on their financial decision making. And when this happens, then economics can go for a toss. Let us examine them today. Welcome back to be rich.
Today, markets are highly volatile, moving all over the places. What do investors have to do?
What do fund managers are good in spite of being aware, most of us are supposed to be susceptible to abuse biases and heuristics used to be included. I suffer from endowment effect. Normally, I get emotionally attached to the asset I won't. And it's very difficult for me to sell. That's my bias.
But in today's market, especially when last 3 to 6 years, the markets have gone up while the headline indexes went up in 2018 19, nothing happened in the broader market.
So what is it important for an investor like me? Who takes a constrain position to the market to do well, I constantly challenged my belief,
why do I do that? most investors like me, normally fall sick to two biases. One is called the confidence bias. And the other is called the recency bias.
The recency bias, is you allow your judgment to be affected by the most recent events, mining Investment behavior should not be affected by what happens today and tomorrow in the newspaper pandemic can help me to do a main muslin strategy, but cannot decide its course completely.
There is life after pandemic will lend by July or August, though the financial damage may linger. So, my investment biases cannot be only on the dangers of this pandemic.
Because if I get too scared, I will never buy and this opportunity will come and go and this window will shut on me. The other thing is confidence base could be confidence basis that I always believe my hypothesis is true.
And once I might believe that my hypothesis is true, then I search for evidences and read newspapers, newspapers, which only confirm a hypothesis, and I don't do anything about it.
What is the cue for it? The cue for confidence bias is To make sure that you challenge your beliefs constantly, you get into discussions and arguments with me and debate with people who have a contrarian view or much discussion and debate, your your, you try to hear the other side of the story.
Once you hear the other side of the story, then you decide whether your position is right throughout 2016 17 and 18.
And then last year, I kept listening and debating with people who had an opinion that this bull market had no yen and the market had only one way to go and that was up people are talking that in no time the Sensex or hit one back then the Sensex
will definitely hit one that the only question is When will it hit one lakh is because the rupee will keep on depreciating in value. So, as the rupee depreciates in value hard assets increase increase.
So, the value of the assets held by the company will increase and so on and so forth. Till finally hit, he just went back. But what most of us don't realize is the journey from 40,000 to one like can go through 20,000 life is not linear like max with 40,000 to one lakh, there is no top of you going to predict awesome markets are rational beings, and can visit 20,000 before deciding to go to one lakh.
So one has to look at economic fundamentals and decide whether you want to be whether your beliefs are correct or not. Buffett had a torrid time for the last five years when people kept cross examining him on his beliefs.
I've gone through the same, including people ridiculing me for my belief that the market will Correct. Correct. Now the market has fallen nearly 40% my beliefs, my my belief is indicated, but I should got myself on the future course of action.
I should not believe that because I said the market would collect and it corrected does not mean that I will not slip up next thing. I need to challenge my beliefs on a daily basis to make sure that I'm not missing catching the next trend.
0 Comments