Question

Wendy is watching CNBC during a day in which the stock market dropped, and the flashes of red on the screen, along with the alarm bells the station keeps ringing, are driving her to near insanity. Even though her advisor reminds her that the stock market will be volatile-this is why it earns higher returns than other assets, she can’t seem to avoid the news. She is glued to the everominous (this day) “doom and gloom” advice on her TV. It is causing her angst, as well as a tendency to want to sell everything she own. 1) What behavior/bias is present? 2) Why is this behavior detrimental? 3) What could have been done differently, or what could be done differently next time to avoid this result?

Answer 1

1) Pyschological factor is present in this situation. This Behaviour arise because of fear of loosing money in the stock market. It is a human tendancy, when the saw that the prices of the shares are falling dramitically, they are nervous and sell there shares without doing any research why the markets are down?
2) When the investor sell there shares in Bear market, without knowing the fact why the market is falling.
Is the market is overpriced? or Is there any rumour in the market which tends the investor to sell the shares and book profit in the market? They have to analyse this situation. In the Bear market most of the good fundamentals company prices are also falling because of falling pressure in the market, if the investor has hold these shares and sell shares because of falling in the prices, they only have to Regret at the last, because when the market is normal these shares are bounce back and gave the good return in a short term period. Investor has to add the good fundamental shares or if the hold it then average the share price by adding more share rather then selling the share, because at that time shares are available at a "huge discount"

3) Investor don't fully rely on the information available on the News channel, they have to do further investigation. Investors have to be more patient at that time, if there goal is for Long term the short term news(or any situation) doesn't effect the goal is they choose a good fundamental company.
Next time when the prices of shares are falling, we have to focus on the value of the company rather than the price of the company.

I hope this clear your doubt.

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