The psychology that can lead investors to make bad financial decisions
Say you buy shares in a company. The price climbs and months later you sell for a healthy profit. Ask why it worked, and the answer is often some version of "I made a good call." Now imagine the trade had lost money instead. Would you be as quick to blame your own judgment? Many of us wouldn't. We may point to bad timing, a jittery market, anything but ourselves.
This study explores the psychological factors that influence investors' decision-making, particularly in the context of trading apps that make it easier for individuals without formal finance training to manage their investments. The researchers examined self-attribution bias, overconfidence, and loss aversion among 72 postgraduate students studying finance and investment at the University of South Wales.
These biases—where individuals attribute their successes to their own abilities while blaming failures on external factors—were found to persist even among those with financial training. While the students performed better in their simulated trading when they had expected to, they attributed their success more to their skill than to chance.
Conversely, when they performed worse than expected, fewer acknowledged their role in the outcome. The study also revealed signs of overconfidence, with students overestimating their performance outcomes, and loss aversion, with many seeking greater rewards for relatively small risks. Despite receiving training in trading psychology, the study found that simply knowing these biases exists was not enough to prevent their occurrence.
However, structured exercises such as reflecting on decisions, reviewing trading history, and setting pre-defined rules for trading did help improve the students' self-rated understanding of these biases. The researchers conclude that while financial knowledge is beneficial, it is not sufficient to counteract these psychological biases.
Instead, they emphasize the importance of structured approaches and self-awareness in managing investments.
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