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Understanding the ins and outs of behavioral finance, from loss aversion to confirmation bias, can equip investors with a distinct edge in the market. Recognizing how people truly behave in financial markets is paramount for success.
Seeking Alpha Analyst Logan Kane is scheduled to speak at SA’s first-ever Investing Summit in New York City on June 18, where he will discuss all things behavioral finance.
Behavioral finance is a field that uses psychology-driven theories to examine market behavior and investor decisions. The discipline attempts to address market anomalies, pointing out inefficiencies and asset mispricing like bubbles.
The efficient market hypothesis, for example, suggests stock prices reflect all available information, leaving investors unable to consistently trounce the market. But many argue the theory does not account for emotional behavior, which can influence stock prices.
Kane explained the behaviors of investors during significant swings in stock prices. If a stock jumps 50%, investors tend to sell it, even though it’s likely to extend gains, he said, citing studies in the U.S. and Western Europe. Conversely, if a stock is down 50%, market participants tend to buy more, even though it’s likely to extend losses.
“When stocks go up 500% things get a little different,” he added, “because you start to get people buying off of [fear of missing out]. Either way, stocks tend to have a lot of momentum in the short run.”
