Does your emotions encounter with the investment decision you make? Know your behavior of investing in market

- Dheerusha Tiwari Are you tired of your failed investment decisions? Are you not satisfied with the return on your investment portfolio? Does your emotions encounter with the investment decision you make? Do you wait too long to sell? Do you fear to buy? Are you more concerned about your loss than gain? With the craze of IPO and FPO escalating in the Nepalese market in the recent years, investors have become more concerned about their investment portfolio. The disciplines of finance have supported the fact that the stock market is efficient and investors are rational in nature; however the emerging discipline of finance i.e. behavioral finance questions the fundamentals of efficient market hypothesis and assumptions of rational investor behavior. Although the knowledge of stock market is growing among Nepalese investors, most of these investors still lack knowledge on behavioral biases. Behavioral biases are basically the behaviors of investors in the capital market that are difficult for investors to recognize, resolve and reduce. It has been few years since the awareness of stock market has spread among Nepalese investors, however, the behavioral biases trace back to a long period of time in the history of Nepalese capital market. Some of the common biases that are practiced by the investors and exist in the Nepalese market are highlighted below: Herding: Before understanding what herding in stock market exactly is, the reader is asked to go back and remember the last time when you simply bought or sold a company’s share just because one of your close friends or relatives did the same. The behavior bias i.e. herding behavior is exactly the action that you might have taken at that time. Herding behavior is the tendency of investors to imitate the actions of other investors without conducting any financial analysis. This bias is more evident in Nepalese stock market as investors usually buy or sell their shares just because everyone in the market is doing so. Overconfidence: Overconfidence is a behavioral bias that is observed when an investor assigns too much importance to his/her decision and refrains from considering the market’s signal. If you have ever abstained from selling the share just because your intuitions tell you that your decision is absolutely correct while the market clearly signals that it’s high time, you should sell your share, thus, such behavior is attributed as overconfidence. The investor gurus and pioneers in Nepalese stock market often suffer from loss due to their overconfidence in the investment decision. Heuristics dealing with information: Heuristics basically refers to using shortcuts in order to come to an investment decision within a limited time frame. Most of the Nepalese investors although embrace enough knowledge related to financial analysis and stock market yet they utilize only certain knowledge to draw a conclusion. For instance, when a FPO is issued in the market, investors usually overlook only a certain indicator instead of analyzing every aspects of the company and decide to invest in the company. They rely only on one major financial tools and thus, make investment decision. In addition to this, when selecting among hundreds of available stocks to purchase from, investors limit their search to only those stocks that have grabbed their attention. You might be one of the victims of these behavioral biases. So, neither hold your investment too tight nor let it go too soon.