How emotions play a role in investing….

Have you ever faced this kind of situation?

You are in a long drive and feeling hungry after a continuous drive of 6 hours….now you pull out your car on the side of the highway eatery and go to a eating joint. There you find two counters in front of you, a fast-food place and a salad and soup café. Your taste buds/tongue feels this uncontrollable urge to eat into the fast-food place, while your mind says to go for the salad & soup cafe. You have two choices, either follow your tongue or the mind. Ultimately, you realise that it’s unhealthy and will not satiate your hunger, so you reason with that impulse and get to the healthier option next counter, by this you quieten your taste buds and get yourself a healthy and satisfying meal. 

Similarly, when it comes to money matters, our impulsive and anxious mind try to find the instant/faster gratifications. If someone offers you an assured double-digit return, we jump up to grab it without understanding the risks. You see the equity market correcting and this anxious mind wants to sell immediately, without understanding the fundamentals of the events surrounding this change. 

Letting your anxious mind overtake your rational self when it comes to money can result in even more anxiety in the days to follow.  Because dealing with the consequences of impulsive money decisions is harder than making and accepting tough choices.

In the book, Thinking Fast and Slow, Noble prize-winning author Daniel Kahneman talks about taming intuitive predictions. He says: you may think it’s rational to pull out money from the markets when a negative event sends stock prices falling down. However, if you pause and reflect calmy, you will realise that corrections are a part of the equity market journey, if quality of your stock is intact and if you are invested for the long term, you needn’t panic. 

You can follow certain steps to gain awareness into the emotions that are driving your money choices and decisions or if you want to curb the anxiety around some money choices and decisions.

First, you should admit that sometimes money matters are emotionally driven. Secondly, you need to acknowledge that controlling emotion and through that your behaviour and actions, is not an automatic task, you have to build awareness and then change habits. For that, it is better to consult a financial expert who can see things rationally with a wider perspective and advise you based on facts and truths rather than some fiction.