Who you are as a person affects how you behave as an investor. In the first of this three-part series on investing personalities, we start with a basic introduction to behavioural finance and how it affects the type of investment decisions you make.
Words by Budget Babe
What’s your investing personality?
One factor that people often overlook is that of behavioural finance, which influences the type of investment decisions you make. Within this psychological field of study, the two most important elements worth thinking about are: confirmation bias and hindsight bias.
[Free Ebook] How should you invest your first $20,000?
Depending on your personality type, you’re more likely to have different levels of these two types of biasedness. But how do they relate to investing?
An investor with confirmation bias tends to look for information that supports his or her perception about an investment, rather than seek out information that contradicts it. This can potentially result in skewed information which then affects one’s investment decisions.
Usually, this will be more disastrous in a scenario when you think a stock is good and mainly look out for its strong points, while ignoring or downplaying other red flags such as loss of book orders or that its key management personnel have been involved in corporate scandals before.
For the purpose of a more exciting illustration, I’ll also use a negative example from my own personal experience.
For instance, while many brokers and investors were excited over the prospects of Keppel DC REIT when it first launched its IPO last December, I was more sceptical towards this stock. This personal bias stemmed from my prior knowledge and working experience with the data centre industry, and it led me to focus more on the competitive landscape that it operates in, rather than its five (out of six) factors which ranked positively in my analysis.
The sole negative factor was that I simply didn’t believe they have much of an edge against their competitors, which led me to confirm and conclude that it was not a good stock for me to invest in. This was confirmation bias at play.
What about hindsight bias? This usually happens when something has already happened, such as when the stock price has already risen and you start to believe that it was quite obvious that the stock price would rise over time. Thus, you become overconfident about the stock, failing to realise that it is market sentiment fuelling the share price climb rather than an improvement of the company’s fundamentals itself.
Similarly, this bias can lead to some disastrous results as well.
Different Strokes for Different Folks
Different personalities have different tolerances for risk, which may influence the type of stocks you choose. Risk-adverse characters, for example, may prefer to invest in government bonds, fixed deposits or blue chips.
Because each of our individual personalities differ, there is never a hard or fast rule to making money on the stock market. A “good” stock can mean different things to the growth investor, value investor and income investor.
Next up: I’ll talk about four different investing personality types based on the DOPE “bird symbol” model created by noted leadership speaker Dr Peter Bender. Using this model, you will be able to easily discern which type of personality you fall under, and how you can use that to your benefit in guiding your investment decisions. Stay tuned!
Read Part 2 here: Investing Personality: Are You a Dove or an Owl
Read Part 3 here: Investing Personality: Are You a Peacock or an Eagle