In the vast wave of financial market, investors' psychological deviation is like an undercurrent hidden in the deep sea. Although it disappears, it can set off stormy waves and profoundly affect the direction and rhythm of the market.
Overconfidence is one of the most common types of psychological deviation among many investors. When investors succeed in several transactions, they often overestimate their abilities and think that they can accurately predict the market trend. This overconfidence makes it ignore potential risks, and excessive trading becomes the norm. Buying and selling assets frequently, trying to catch every tiny fluctuation, but unconsciously accumulating high transaction costs, and easily suffering heavy losses due to random fluctuations in the market. For example, in the rising stock market, overconfident investors may buy a large number of high-valued stocks. However, once the market reverses, the prices of these stocks will drop sharply, and investors will be in trouble, which will lead to panic selling in local markets and aggravate market turmoil.
Herd effect is also a psychological deviation that cannot be ignored in financial markets. When making decisions, investors are often influenced by the surrounding groups and blindly follow the choices of the public. When an asset class or investment strategy is popular in the market, investors will flock in even if the asset itself is overvalued. This irrational follow-up behavior leads to the rapid rise of asset prices and the formation of a market bubble. Once the bubble bursts, a large number of investors will suffer huge losses, and the relationship between supply and demand in the market will also be seriously damaged. Just like in the real estate market, when the house price in a certain area continues to rise, many investors rush to buy houses without considering the actual economic fundamentals and supply and demand situation in the area, pushing the house price out of the reasonable range, which may eventually lead to the collapse of the real estate market and cause a heavy blow to the entire financial system.
The twin brothers of fear and greed also influence investors' decision-making at all times. When the market rises, greed drives investors to keep chasing after high prices, hoping to obtain greater returns, ignoring the fact that asset prices have deviated from their intrinsic values; When the market falls, fear makes investors panic and blindly sell assets, which further intensifies the downward trend of the market. This emotional trading behavior makes the market price fluctuation artificially amplified and deviates from the reasonable track determined by fundamentals.
The existence of investors' psychological deviation makes the financial market not a completely rational and efficient operation system, but full of uncertainty brought by human weakness. Understanding and identifying these psychological deviations will help investors to optimize their investment decisions and avoid losses due to irrational behavior; For financial institutions and regulators, it is helpful to stabilize the financial market and promote its healthy and orderly development by guiding investors to cultivate rational investment concepts and improving market mechanisms. In the future financial investment practice, only by constantly overcoming psychological deviation can we ride the wind and waves in the complex financial market and realize steady wealth appreciation and market prosperity.
