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In this episode of Stocks in Translation, Wave HQ CFO Michaella Gallina joins Markets and Data Editor Jared Blikre and Producer Sydnee Fried to discuss investor psychology and how cognitive biases can impact an investor’s trading account.
Blikre explains that investor psychology refers to the emotions, biases, and decision making patterns that influence how people invest. Things like impact buying and selling and risk can be affected by things like fear and greed, overconfidence, and loss aversion. Gallina goes into detail where she’s seen these biases come into play first hand.
“I have seen these biases come from basic retail investors, and the data shows us that all the way to working for a self-made billionaire at one of the largest growth shops, we all face these same issues,” Gallina explains. “The three that I really pay attention to are loss aversion, recency bias, and confirmation bias. I think loss aversion is fascinating because it’s essentially the concept that we feel losses as an investor at 2x the rate of the emotion than we feel joy when it comes to gains. There’s fascinating neuroscience about this. The neuroscience actually tells you that when you feel a loss as an investor, the same part of your brain that lights up when you feel physical pain. So that just goes to show you we're already against human nature in such great form to not make trading decisions based on emotions or at least to try not to.”
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When it comes to overcoming these biases and pushing through the things that are holding investors back, Gallina advises a few things. The first is to recognize these cognitive behaviors.
“Understanding that you can make emotional decisions and it can hurt you versus staying the course over the long term is always the first step. The second I would say is if you use typical value frameworks of looking for true intrinsic value, of using free cash flow as a good metric, of understanding valuations over time ,and you stick with the fundamentals. To me, value investing is all about continuing to stick with the fundamentals.”
Twice a week, Stocks In Translation cuts through the market mayhem, noisy numbers and hyperbole to give you the information you need to make the right trade for your portfolio. You can find more episodes here, or watch on your favorite streaming service.
This post was written by Lauren Pokedoff.