EmilyLou
Behavioral stock analysis is investment management that incorporates psychological variables affecting the securities markets and stocks. While traditional analysis, for instance, value and growth research considers balance sheets and economic forces in regard to the stock market, behavioral stock analysis pays attention to feelings, heuristics, and imitation by investors.
The Role of Investor Psychology
Emotional aspect has the greatest influence on the stock exchange rates. Some of the feelings incite people into taking actions that cannot be explained by rational thinking; feelings like fear, greed as well as overconfidence. For example when a market is declining, the individuals fear may compel them to dump the stock, even though the signal is not good. On the other hand, during the bull markets the rate of price increase happens beyond the actual book value of the stocks.
Major Constructs of Behavior Analysis
Herd Mentality: People, especially those in charge of funds to invest believe that everyone is right and everyone’s trend will make them get richer. It can lead to asset greater bubbles or overly-reaction markets:
- ANCHORING: Working from a confined number of reference points, such as the purchase price of a particular security, reduces the capacity of the investor to make rational decisions on future securities.
- OVERCONFIDENCE BIAS: Self-attachment may cause the investor to overestimate the level of their knowledge or their ability to forecast market’s behavior which will lead to risky decisions or unsound decisions.
How Behavioral Analysis Can Improve Investment Strategy
That is why, the understanding of such psychological factors as overconfidence, self-attribution and the bandwagon effect allows to make wiser decisions. Behavioral stock analysis is less prescriptive as it involves a part reliance on formal stock analysis but the analyst is concurrently conscious of stock market psychology. Mark Fletcher has an insight of when emotions help in forming the market, investors can take advantage of stocks that are not fairly priced or avoid being trapped in a ??bubble’.
Behavioral stock analysis is also effective in that it give us clearer picture of the stock market that traditional analysis cannot give us.
