The concept of Homo Economicus
considers us as rational, aware and self interested persons.
And under such assumptions we
attempt to maximize the utility as a consumer and economic profit as a
producer.
In the practical world none of us
behaves even close to the assumptions of such rationality, especially when it
comes to our investment pattern behavior. It is interesting to observe that our
understanding of the value of money changes as per our environment or the stimulus.
I would like to share two
scenarios where you are a consumer in one and investor in the second. Be honest
in your responses before reading the answers to evaluate your investment
pattern behavior.
A. With
a limited shopping budget and a credit card in the wallet:
1.
If
there is a discount of 10% on a pair of shoes worth Rs 5000 shoe and 25% on a
pair of shoes worth Rs 8000 which one will you chose?
2.
You
want to buy a shirt but there is only 10% discount on one shirt but 20% on two
shirts and 30% on three shirts. Which offer will you take?
If, in any of the above cases
your response is the second or third option, then you must realize that you
over-stretched your budget. Buying at a discount is perceived a sensible
decision but if we calculate the amount of money spent then we will find that
it was higher than what we actually had. And having a credit card led us to
behave under House Money Effect.
B. In
the case of your investments:
You bought a share of company
called Imperial at Rs 500 one year ago and the share price is now at Rs 1000.
Similarly, you bought a share of company, Regalia at Rs 2000 one year ago and
the share price is now at Rs 1000. Now, if you immediately need Rs 1000, which
share would you sell?
Do you want to keep the share of
company Regalia in the hope of covering the losses? If yes, then you have just
exhibited a bias of Loss Aversion.
Creation of wealth is
fundamentally a function of your emotional responses. Your natural psychological
preference determines your investment pattern. In short, the way you do
something is the way you do everything! You need to watch out your behavioral
response to protect and grow your wealth.
In case you are not satisfied
with the amount of money you have accumulated by now. Or, you are not happy with
the returns generated by your portfolio. Or, if you see any danger of missing
or delaying of your long term goals like buying a house, then you must reflect
upon the following questions:
1.
How
aware are you of your investment decisions?
2.
How
shielded are your investments from your emotional responses?
3.
How
would your goals suffer due to your emotional bias?
If you are buying when the market
is high and selling when it is going down then you are doing nothing more than
chasing a high return story. An ideal solution is to identify the errors in
judgment and to stop repeating them. Get aware of your risk profile and align
your asset allocation to it. In no case should you allow your advisor to change
your asset allocation.
Discipline in investing allows us
the greatest of opportunities to create wealth. I believe the S&P BSE
Sensex will touch one lakh points someday. Do you? And if you do, then are you
invested enough to make the most of it?
