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For those who keep an eye on their investments every day and act daily, it is possible that your emotions will prevent you from seeing more consistent and more lucrative returns.
Wave HQ CFO Michaella Gallina has detailed how investor psychology-or the emotions, prejudices and decision-making patterns that influence how people invest and play an important role in a person’s portfolio.
The three prejudices that they pay particular attention to are loss aversion, recent bias and confirmation advantage.
“I think that loss aversion is fascinating because it is essentially the concept that we as an investor twice the speed of the emotion that we feel joy when it comes to winning,” Gallina said on a shares of 4 March in the translation podcast. “I think being aware of this cognitive behavior is the first step. Understanding that you can make emotional decisions and it can harm you versus staying it in the long term … is always the first step.”
Gallina noted that loss aversion is the most harmful bias for the portfolios of many investors, resulting in a “much sustainable effect” than some of the other prejudices that influence trade decisions.
She pointed to a JPMorgan survey from 2024 which showed that 40% of retail investors tended to sell low points at the market.
“So they feel those losing even more,” she said. “And then the emotional toll is on top of that even greater. So these emotional fluctuations can cause terrible decision -making.”
It is easy for an investor to look at the short-term trends in the markets and to make decisions of knee shocks in response to these cycles. Gallina argued that sticking to your investments, even through decline, can actually yield greater and more consistent returns.
Read more: What is passive income and how do I generate it by investing?
That said, Gallina noted that prejudices can even influence passive strategies. She explained that if you follow the markets, you might hear in the news that you should rely on diversified ETFs. If you decide to sit on the sidelines with a passive strategy, that can also be a reflection of the recentias or confirmation advantage, because you may rely on recent information or not challenge previous beliefs.
“We are usually more influenced by news and headlines in the short term than we are long -term trends,” Gallina said. “And so as the market evolves, I saw traders who might think of passive strategy if the right thing might think differently over time – or the same thing.”
