What is investor psychology analysis?
Investor psychology analysis is a method that analyzes the behavior of investors, such as what they believe, how they act, and what they do. Behavioral finance is an area of study focusing on how psychological influences affect market outcomes. Some common behavioral financial aspects include loss aversion, experiential bias, and familiarity tendencies. Details are shown below:
- Loss aversion
Loss aversion happens when investors place a greater weighting on the concern for losses than the pleasure from market gains. In other words, they're far more likely to try to assign a higher priority to avoid losses than making investment gains.
- Experiential Bias
An experiential bias happens when investors' memory of recent events makes them biased or leads them to believe that the event is far more likely to occur again.
- Familiarity tendencies
The familiarity bias is when investors tend to invest in what they know, such as domestic companies or locally owned investments. As a result, investors are not diversified across multiple sectors and types of investments, which can reduce risks.
Generally speaking, investor psychology, such as fear and greed, plays a significant role in individual and mass behaviors, because they are part of a much larger set of attitudes and emotions that sways investors’ decisions and affects markets as a whole.
