Behavioral Finance…on TV

this is a transcript of a talk session Vikram Oza did on UTVi – and it appears on too.

Leaving emotions out of your financial decisions is tough. Behavioural Finance is a science that gauges among other things, the rationale of investment decisions. UTVi talks to PV Subramanyam (Subra), financial trainer on the subject and discuss how being unemotional is crucial in matters of finance, especially in these volatile times.

When there was a flutter about ICICI bank, people started breaking their fixed deposits… taking their money out from their accounts… Earlier with the Tsunami, real estate lost favour… People started withdrawing from it. We tend to take investment decisions in panic…

Subra: If a person is serious about his equity investments, he will be emotional about it. It is difficult to say buy a share and not be emotional about it. If you have all your money lying in ICICI bank and you feel there is a problem with the bank you WILL panic.

Do you see people facing losses because of hasty decisions?

Subra: Actually, people do face losses because they react to such kind of news. Either they react a little too early or a little too late.

Markets have come down from 21,000 levels to 8,000. Analysts are saying that it is the right time to buy. But investors are into panic selling…

Subra: That is typically how people react. First, when the market came from 21,000 to 18,000, there was denial… you say this is temporary… At this point, you need to say I will invest in a disciplined manner than react to market prices.

There has been a study on the behaviour of people’s investments as far as their financial investments are concerned…. it’s called Behavioural Finance. This is applied from psychology to see how people react to financial situations. There are certain things like mental accounting. Your mind tends to make you feel good. So when things go wrong your mind tells you that this was your broker’s mistake… the market’s mistake… So you keep fooling yourself that you are very smart, and that you will never go wrong.

Vikram Oza: Don’t people react to panic situations when they don’t know what the future holds, because of that uncertainty, they say, better be safe than be sorry?

Subra: There are two situations. One is to be safe than sorry, the other is to consider what would others think… In a panic situation you should look like you have tried. And you fool yourself by saying ‘I have got rid of all my shares at 9500’. When market goes to 9000, you suffer from confirmatory bias… You say, I knew that the market will go down and the market HAS gone down from 9,500 to 9,000, you think you are very smart. What you have missed is the journey from 21,000 to 9,000. And when the market goes from 9,000 to 11,000, you have already lost the so-called ‘gains’. At 11,000, you say the markets will come down to 9,000 and then I will buy… the rise may  be sudden and stunning!

Keeping all that in mind, if I want to remove emotions out of all my investment decisions, what do I need to do?

Subra: Just go out and invest in some notebooks. Write down in your notebook what you are buying and why you are buying. Write down the emotions part of it. Maintain a personal investment diary and write down all your investments in an excel sheet. See, how much you are earning. Six months later your 200 page notebook will show you what you have done. If you have done very well, good… continue doing it. But, if you are underperforming the index, underperforming the fund managers, don’t invest directly in equities, put your money in mutual funds, in SIPs or in some kind of automated trading. Look at your asset allocation, like how much of your money should be in equity and how much in debt. A Systematic Investment Plan (SIP) completely removes emotion.

Do you approve of automated systems? …Using machines to make your equity investments, would it help?

Subra: Your emotions are completely removed when you use automated systems. In these volatile times, especially, if you are a buying guy, you have to continuously keep buying and selling. In this case, you are much better off giving this to software which is well written. But remember behind the software, there’s a human who has written it logically as to what you should do when the markets are down and all this is thought of and written unemotionally. Even automated systems cannot protect your capital entirely.

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