Picture this: You’re strolling through a serene forest, birds chirping, leaves crunching underfoot. Suddenly, a wild kiwi (not the fruit, mind you) appears! Its beady eyes lock onto yours, and adrenaline surges through your veins. Your heart races and your brain screams, “Fight or flight!”
But wait! It’s not a life-threatening situation; it’s just a curious kiwi wondering if you’ve got any snacks. Your body, however, is convinced you’re in an epic battle for survival. Our ancestors faced real dangers like sabre-toothed tigers, so their stress response was a lifesaver. But today, it’s like activating a fire alarm for a burnt piece of toast.
In the bustling realm of finance, where spreadsheets and stock tickers reign supreme, there’s an unsung hero: human psychology. Yes, you heard that right—our quirky brains play a starring role in shaping investment outcomes.
Why So Emotional? The Role of Emotions in Investment Decisions
Human emotions are extremely powerful drivers of behaviour, acting as both catalysts and navigators in our daily lives. They can compel us to pursue goals with great passion, as the joy and satisfaction of achievement fuel our motivation or they can also lead us to our own demise. Imagine sipping your morning coffee, eyeing your investment portfolio. Suddenly, emotions surge like a tidal wave. Fear, greed, and FOMO (Fear of Missing Out) collide, creating a symphony of irrational decisions. But why? Because our brains are wired for drama.
Fight or Flight: Millennia ago, our ancestors fled sabre-toothed tigers. Today, it’s market volatility that triggers our fight-or-flight response. (Spoiler alert: The stock market isn’t a tiger.)
Overreacting Drama Queens: Stressors—like work deadlines or a bear market—can send our emotions into overdrive. Cue the dramatic gasp!
We’re a Biased Bunch
Meet our cast of behavioural biases —quirks that make investors dance to their own tune:
1. Overconfidence:
Imagine a peacock strutting its stuff. Investors often overestimate their abilities, leading to excessive trading and underperformance. Charlie Munger wisely said, “Knowing what you don’t know is more useful than being brilliant.”
Investor: “I’ve got this! I can predict market moves like a psychic octopus.”
Reality: Excessive trading, risky moves, and underperformance. Turns out, the octopus was just ink-squirting.
Our strategy: Stay grounded at all times.
2. Herd Behaviour:
Ever seen a flock of sheep follow the leader? Investors do the same. FOMO kicks in, and suddenly everyone’s buying high during market booms and selling low during downturns. Baa-d idea!
Investor: “Everyone’s buying Nvidia! I must join the AI craze!”
Reality: FOMO. You’re only buying because you’re afraid of missing out.
Our strategy: DYOR (Do Your Own Research) or invest with someone who can do it for you.
3. Loss Aversion:
Losing hurts more than winning feels good. It’s science! Investors cling to sinking stocks, hoping for a miraculous rebound. It’s like playing “Deal or No Deal” with your portfolio.
Investor: “I can’t bear losses! Diamond HODL (Hold On for Dear Life).”
Reality: Clinging to losers like a barnacle on a rusty anchor is a bad strategy.
Our strategy: Sell and move on.
4. Anchoring Bias:
Imagine a ship anchored to a rock. Investors fixate on reference points (like their purchase price), ignoring other info. Result? Holding onto sinking ships (stocks) or waiting for lost treasure (profits).
Investor: “I paid $5 for this stock. It can’t be worth less!”
Reality: Stuck in a price vortex, ignoring the market almost guarantees failure.
Our strategy: Forget what you paid for it; that’s irrelevant to the market.
Whether you’re a seasoned investor or a KiwiSaver enthusiast, remember this: Our brains are both heroes and villains full of unhelpful emotions. Acknowledge biases, stay informed, and maybe—just maybe—outsmart your inner drama queen.
So next time you check your KiwiSaver balance, imagine a dramatic orchestra playing in the background and follow the advice from one of the world’s greatest investors “People are trying to be smart – all I am trying to do is not be idiotic”.
And as for that wild kiwi? Well, maybe it just wants financial advice. Or a snack.
After reading this, if you feel like you need some friendly advice, get in touch.
Pie Funds Management Limited is the issuer of interests in the Pie Funds Management Scheme and the Pie KiwiSaver Scheme (’the Schemes’). Any advice is given by Pie Funds Management Limited and is general only. Our advice relates only to the specific financial products mentioned and does not account for personal circumstances or financial goals. Please see a financial adviser for tailored advice. You may have to pay product or other fees, like brokerage, if you act on any advice. As manager of the Schemes, we receive fees determined by your balance and we benefit financially if you invest in our products. We manage this conflict of interest via an internal compliance framework designed to help us meet our duties to you. For more information about how we can help you, or to see our product disclosure statement, please visit www.piefunds.co.nz.