Global capital markets have undergone significant turbulence due to the COVID-19 pandemic. Therefore, many investors all over the world have seen a dramatic decrease in the overall value of their investment portfolios. According to experts like Shay Benhamou, how these investors respond to the losses they have suffered can be critical for staying on track with the long-term goals they have. At a time like this, it is certainly not clear as to what may be your best course of action. However, there are some insights that can help investors in thinking more clearly about the decisions they have to make.
Below are some of the human behaviors that Shay Benhamou believes can affect your investment decisions and they are brought on by the global coronavirus pandemic:
- Loss aversionĀ
People donāt feel gains and losses in the same way. According to Shay Benhamou, psychologically people tend to experience losses twice as strongly as they do gains. In simple terms, losing $100 can be more painful than making $100 in profits. Even if your portfolios were to go back to their pre-crisis levels, investors will still believe they are worse off because of the pain of the losses they have experienced.
- Risk seekingĀ
Experts like Shay Benhamou state that people are more willing to take risks for avoiding losses than they are for making gains. After investors have experienced a significant drop in their portfolioās value, their desire to be able to recover their losses can push them into taking more risks. Due to this risk-seeking behavior, they even end up pursuing investment opportunities that may not align with their goals in the long-term.
- Myopia
Shay Benhamou says that focusing too much on the present and not thinking about the big picture can often lead to myopia. This often happens when investors become focused on a particular investment, rather than considering their portfolio as a whole. Myopia also happens when investors receive information regarding their investment performance on a regular basis and it drives them into adopting strategies that are not in accordance with their investment plans.
- Availability
As mentioned above, one of the primary causes of myopia is information. However, Shay Benhamou highlights that not all information receives the same attention from investors. The information that comes more easily to mind is likely to be used more in the decision making process. Social media and the 24-hours news cycle can often cause investors to overweigh certain information when they are making decisions. This results in market bubbles, herd behavior and other undesirable investing behaviors.
- OverconfidenceĀ
This is rather easy to understand; when people perceive their abilities to be a lot greater than they really are can lead to overconfidence. Shay Benhamou highlights that this is a common problem for investors. Historically, capital markets have rebounded from sudden crashes and decreases. As prices fall, a lot of investors try to determine when the market will hit its lowest point so they can purchase more assets just before prices start climbing back up. Overconfidence can often make investors believe they can time the market, even though most are not able to do it.
- Sunk cost fallacyĀ
As per Shay Benhamou, when investors let costs that they cannot recover, such as money and time, to affect their decisions, it is known as the sunk cost fallacy. When a stock price falls, investors may buy more of it at a lower price hoping that an increase will help them in recovering the money that they lost in the initial price drop. A previous investment should never influence your decision to buy at a lower price because this is called the sunk cost fallacy. If the price continues to fall, you will only end up multiplying your losses.
These aspects of human behavior are playing a prominent role in the decisions made by investors during the COVID-19 pandemic and Shay Benhamou suggests that you eliminate them to think more clearly about your decisions.