Guide for traders

Economists have traditionally tried to understand markets by using models in which all market participants are rational. The rational frame is a simple model, and could be considered very effective if its predictions were confirmed by the data. But researches made in decision-making, show that most investors behave relatively unorthodox and feelings such as fear, greed, uncertainty and competitiveness do not allow them to make the right decisions.

The range of Behavioral Finance is fairly broad and cannot be covered in these lines, but it is worth mentioning the case of "Herding Psychology" or "Mass Psychology", which is a type of behavior based on empirical rules and which considers that individuals tend to be in harmony with the majority of decision-makers in the same environment. It is essentially an outright duplication of investment choices that ultimately leads to convergence of actions and is particularly noticeable in periods of intense change where investors prefer to ignore their own estimates and information and follow the market trend.

Knowing the possible mistakes that an investor can do as well as his habits, we can not only avoid them, but we may also take advantage of them by making better predictions and placements.

 

"Psychology has a story to tell about investment practice and is different from what Economics support." Daniel Kahneman

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