The Psychology of Investing: Why Do the Best Investors Against the Market

What separates the best investors from everyone else? Is it purely experience and gut instinct? Or is there something more to it?

In this article, we'll explore the psychology of investing and why the best investors often go against the market. By understanding these principles, you can learn to make more informed investment decisions and improve your portfolio returns.

1. What Is The Definition Of “Behavioral Finance”?

Behavioral finance is the scientific study aimed at explaining the phenomenon of investment performance. It explores why and how people make money in the stock market. The study aims to discover why some people outperform others, and if it’s really due to the luck or the skills and study success. The study attempts to see what genetics and environment play a role in investing.

2. When Not to Invest: Picking the (Lifestyle) Right Time to Invest

You may have heard something about following the market or sticking to index investing. Let’s put this aside for a moment because, believe it or not, it’s not that clear. It’s not that simple.

Over half of stock changes occur in the first three minutes after they’re announced. Studies indicate that investors are better off not worrying about day to day movement. Putting your attention on the index or a global stock is a bad idea. If you’ve looked at the ways investing was traditionally done by the general public, this line of thinking was likely familiar to you. Most of the time, customers would wait to buy a stock when it starts appreciating. They’d get the benefit of an equity appreciation directly through their account. However, for them that is mostly luck.

3. A Little Background On Behavioral Psychology

Behavioral psychologists believe that individuals make decisions far more often than they realize.

Just focusing on one’s life can make the person engage in behaviors that they might not have otherwise. It also happened that rational, pleasurable thinking was different than recreational thinking. This led to the pivotal term behavioral economics. The impact that this term had around the world was immense. The term gained prominence as part of the financial markets. Behavioral economics informed how people behaved and made their investment decisions.

4. Behavioral Finance, Behavioral Economists and Surveys On Success

Let’s explore why things — or people — go up and down.

The world across many industries has been heavily influenced by a highly revolutionary idea from behavioral economics that shows that irrational thinking patterns are deeply tied to many behavioral choices that we label as being ‘normal’. As a result, this theory has received a lot of attention and reshaped our thinking, explaining a lot of human behavior. In part, behavioral economists determine whether a so-called rational decision making pattern like a ‘normal’ investment is actually driven by emotion or subconsciousness such as a habitual laziness.

In fact, they discovered that this subconscious thinking in our minds can be a pattern.

Because if it is a ‘normal’ pattern we follow unconsciously, it makes us more predictable, more likely to do the same thing the same way later— no matter what. This also explains the ‘normal’ spending patterns like shoppers buying a lot of things they don’t need in a ‘black’ market we call consumption.

5. 4 Rules for Behavioral Finance

Early in his career, Nobel laureate Daniel Kahneman coined the term "heuristics and biases." The word heuristics, according to Merriam Webster, is the name that is given to mental shortcuts that help us make smart decisions.

With regards to complex situations, Kahneman and Amos Tversky suggested there was a clustering effect, so that you had better judgments when analyzing the longest answers in a series in addition to all the other factors.

The rule of thumb for investing is that you shouldn't buy a stock based on numbers alone, but rather you should have an overall feel about whether the value is sustainable, then what the shares are trading for, and the company's viability.

Remember that whenever you are faced with a decision, you should make it a rational one and avoid systematically downfilling one category of bias for another.

6. Conclusion: When to Invest and Not to Invest

How to invest and when not to invest is still one of the most interesting questions in investing and portfolio planning. Some experienced investors, advisors and analysts believe that timing the markets is a way to ensure that you maximize unbeatable investing returns.