INVESTORS BUYING BEHAVIOR

BY: MAWUNYO ADJEI.

Why Do Investors Buy Into The Stocks They Do?

Investor Buying Behavior simply involves studying

why investors buy into the stocks or businesses they do.

Investor Buying Behaviorists believe there is so much to stock market investing than just Mathematics.

Instead of trying so hard to study the charts and trends of the market, why not study the people that make up the market?

Warren Buffett once said “If Algebra and Calculus is what is required to be a great investor, I’d have to go back to delivering newspapers.”

1. Investors hate losses more than they love gains2. Price history plays an influential part in the minds of investors especially on decisions regarding buying or selling 3. Given any access, investors are likely to have a quick look at their portfolio’s performance.

EMOTIONALLY-DRIVEN INVESTING BEHAVIORS

4. As investors, we tend to hold onto our confidence when a stock in our portfolio plunges but we often sell too early when the stock begins to recover.5. We keep buying when the market is at manic highs and sell when the market is at depressive lows.6. When we recently profited from a stock’s surge in share price, we are more likely to buy into a similar stock.

EMOTIONALLY-DRIVEN INVESTING BEHAVIORS

7. In the business of investing, trusting the numbers is more rewarding than trusting the people.8. Almost every investor believes he or she is better at stock picking than most people.9. We all believe we can outperform the market.

EMOTIONALLY DRIVEN INVESTING BEHAVIORS

Investor Buying Behavior was coined from Behaviorism which was started by J.B. Watson.

J.B. Watson emphasized the importance of Observation in studying behavior.

Behaviorism studies the relationship between stimulus and response.

The types or theories of Behaviorism include: Cognitive learning, Observational Learning, Operant learning, Classical conditioning and Insightful learning.

Cognitive Learning: Involves mental processes such as thinking, knowing, problem solving, remembering, and forming mental representations.

If you are scrolling through hundreds of public companies, the stocks you will stop to click are the ones which remind you of something or create an image in your mind.

Theories Of Behaviorism

A type of cognitive learning called Insight Learning also involves sudden realization or recognition of previously unseen relationships.I call it the “How come I never noticed.”

An investor may skip a particular stock which perfectly fits into his investing strategy for a very long time probably because he is too busy focusing on other stocks outside his circle of competence, till he finally stumbles upon the stock and gains a new insight.Anytime we are faced with a decision, we are likely to use the same old approach.

Observational Learning: It involves changing your behavior in order to adjust or conform to a model’s behavior.

This is very common in Wall Street.

A billionaire investor with a great following buys equity in a stock and publicly explains the reason for his position.

The investing public who perceive him as a model are likely to follow suite or buy a similar stock in that industry.

Operant Conditioning: It is based on reward and punishment.

We tend to repeat more of what we get rewarded for and we tend to avoid what we get punished for.Investment strategies that are rewarded are likely to be repeated.

Also, if an investor buys a Paper-manufacturing stock which plunges and buys another Paper-manufacturing stock which plunges, he or she may completely stay away from such industry for a long time.We are likely to sell a stock if we get punished with a stock price fall.

If an investor buys a stock out of overconfidence and almost becomes bankrupt as a result of that particular investment, he or she may stay away from that industry for a very long time

But if an investor gets rewarded with a stock price surge for buying a stock, he or she may focus on stocks with such similar qualities.

Classical Conditioning: Learning to associate between two events and its guaranteed outcome can be a goldmine.

For instance; a short seller finds out that anytime top executives leave a company within a specific time frame, the stock price plunges for a very long time.

So anytime there is announcement of top executives leaving, investors become concerned and the short seller shorts. However, after a series of successful pairings, the short seller may short even when he hears rumors of executives leaving a company.

NB: Always wait for the meat to be presented.

A major meat (unconditioned stimulus) that makes investors salivate unconsciously is “share price”.

An investor may have associated that anytime he bought into a mid-cap Textile stock trading below $10, the stock rallied within a short-term. He chalks a series of success with this strategy. Thereafter, anytime he sees a mid-cap Textile stock trading below $10, his hands get itchy to buy without making the necessary research that he would make for any other stock.

The greatest investments are often the ones we don’t make: Gaining knowledge of your emotionally-driven financial decisions can help you to better control your buying behavior.

Monetizing from investors’ behavior: Behavioral Investors lead the flock of investors by going ahead of them to where the greener pastures are or simply by predicting investors’ response.

WHY STUDY INVESTORS’ BEHAVIOR?

Psychologists identify certain judgemental evaluation and rating errors in appraisal.1. Error of Central Tendency: Is when the

stock picker is reluctant to assign high or low ratings to stocks he or she is researching on. In such a mood, a stock picker will not buy stocks because he perceives all the available options to be average.

Errors In Stock Picking Decisions.

2. Leniency/Strictness Error: A stock picker is likely to buy or short in this state because he assigns very high or very low ratings to the stocks under study. 3. Halo Error: The tendency to focus on

one aspect of a stock’s performance and allow it to influence your buying decision.

For instance focusing solely on the stock price or business model and ignoring accounting errors or management’s integrity problem.

4. Recency Error: Most stock traders fall prey to this rating error. We rate a stock’s future performance by its recent performance.Thus, we buy when the price is rising hoping it will keep rising in the near-future.5. Contrast Error: Is when a stock’s performance rating is based on comparison with another stock just previously evaluated.

6. Similar-to-me Error: This can be a good error because you only buy into stocks within your circle of competence or companies you know.

With this, the stock picker inflates the evaluation of a stock due to a mutual personal connection. If a listed company has the same name as your nickname in high school, you are very likely to give it a biased attention.

Overconfidence Bias: Putting so much faith in a stock or one’s stock picking prowess. It is a too-sure-to-fail investing bias.

Predicting the likelihood of a stock’s performance should not be by gut-feeling but by relevant facts. Investors often falsely believe they can pick investments better than most people.

Investing Bias

Confirmation Bias: Being on the lookout for arguments or information that backs your perspectives.

It involves subtly focusing on stock ratings or media articles that confirm or support your stock picks, investment approach or financial projections.

Recency Bias: Using present situations, events or performance to predict future performance.

Judging a stock’s long-term performance by its wonderful results in recent times instead of years of consistency.

Survivorship Bias: Drawing conclusions from companies that have become successful and then ascribing reasons for their success.

This is a good bias.

How To Control Your Emotions As An Investor

WHAT INFLUENCES INVESTORS TO BUY?

FOR ENTREPRENEURS & EXECUTIVES

HOW DOES IT MAKE ME MONEY?

The Number One Question Investors Care About:

1. Investors buy into opportunities.2. Investors buy to increase their money

The main difference between investors and philanthropists is that investors expect monetary returns on their investments

The number one person CEOs should be working for is their shareholders or investors.

WHY DO INVESTORS BUY?

Give participants a long list of company names in no particular order. Participants are to click on just one, read the details about the company and do a presentation about the chosen company.

Find out the factors that made them click on the companies they did.

Pre-Evaluation Training