When investors place a losing position because they want to sell. That’s why people hold losers and resell winners is irrational behavior, says
Independent market expert Arun Thukral.
Arun Thukral has over 3 decades of experience in the BFSI world and has been investing in the markets for over 2 decades. He is the former MD and CEO of Axis Securities.
In an interview with ETMarkets, Thukral said, “Sometimes you know you’ll make more money if you sell a losing position and switch to a better position.” Edited excerpt:
Recent data suggests that strong retail investor strength appears to be slowing, at least from a trading perspective. Are there any hints for us in the field of behavioral finance?
a) Yes, this behavior is about finance because it is about the psychology of finance. I’ve also recently seen some industries telling us volumes are down about 40-45% — mid-cap stocks could be down as much as 50%-60%.
What we have seen is how people got into trading after COVID, mostly day trading. Learning in the markets never stops and newcomers behave suboptimal.
They don’t act rationally and the same behavior applies when it comes to finances.
Mind the Money: Why Small Investors Lag Behind and Winners Sell: Arun Thukral Explains
When investors hold a losing position because they want to sell at a loss. That’s why people will keep losers and sell winners — that’s irrational behavior, says Arun Thukral, an independent market researcher.
What exactly is behavioral finance and how is it affecting the investing behavior, greed and fear we are all talking about on Dalal Street?
a) Behavioral finance is basically a challenge to traditional finance theory. Traditional finance theory will tell you that markets are efficient, everyone has information, and everyone makes equal money, but we’ve always seen that never happens.
This means that investors are not playing rationally. They play to their liking. Behavioral finance really helps you understand what you’re doing and why.
And once you understand this, you can create your own strategy and become aware of your style. The aim is to know the behavior of the investor and then, if possible, to change the behavior, i.e. behavior finance.
This transactional finance has two fathers – one is Daniel Kahneman and Amos Tversky. He’s written a lot about behavioral finance and talks about a lot of things, mostly “probability theory”.
He also talked about mental accounting and other things. Once you understand this, studying behavioral finance becomes easy and studying your own behavior becomes very easy.
Tell us more about this probability theory?
a) Prospect Theory is nothing more than basically how you view your perceived gain or perceived loss. Suppose you bought a share for Rs.100.
Investor A bought the stock for Rs 100 and it went up to Rs 40 but now it is trading at Rs 120. Another investor, B, also bought the stock at 100 rupees, it went up to 200 and now it is trading at 120.
Another investor will not be happy as he thought it got 200 but now it is trading at 120. Investors bought the stock for Rs 100 and now it is trading at Rs 120 – therefore perceived profit is viewed and treated differently. Loss is seen differently.
Probability Theory talks about how to formulate a problem/problem. How do you frame a certain topic with negative or positive connotations?
Similarly, in mental accounting, people may receive money from bonuses or lotteries, they think that money can be exploited or set aside. That’s why they act irrationally and that’s what probability theory tells you.
The real investor would make money by doing the opposite, because one buys and the other sells.
When markets fall, most investors who think the perceived gain is better lose. When the market goes down, the volume goes down because most of us are bullish by nature, that’s the behavior.
The seller is making a lot of money at this time, so there is actually a study on the behavior.
Why do people or investors lag behind in their portfolios and sell so-called multibagger stocks, or at least those that created fortunes for them, then what does the rule book say about such a scenario?
a) The rule is very simple – you bought a stock for $100, but now you have this anchor bias.
If the stock is below 100, you won’t sell it because you keep thinking that the loss will hurt again. Loss avoidance is another term we use in behavioral finance.
When you have a winner and you sell that stock, you’re satisfied that you’re selling it for a profit, knowing that you’ll make more profit by doing so.
“But you would say that something is better than no win or a little loss is painful, say”
The story started at 94, many investors would have sold 96, 99, 2001, 2002, but those who are still holding are happy because they held on to the winners.
Those who bought real estate stocks say prices rose 10 years ago, but that price hasn’t returned to this day.
If investors still hold it because they want to sell it. Because of this, people will hold losers and resell winners, that’s irrational behavior.
Sometimes you know you’ll make more money if you sell a losing position and switch to a better position.
We’ve seen a nifty double-digit drop over the last 12 to 18 months, and most of the portfolio, at least if they started investing, say a year or 18 months ago, would be making negative returns at this point . , How to manage this feeling?
a) What has happened is that a lot of things are written on paper again in the last few days when the holder return of a year becomes negative.
If you remember a week ago everyone was talking about how a year’s rolling return went negative, that’s called framing, the way you imagine investing a year ago now. The investing investor also loses.
This is affecting many investors so they start selling, but maybe whoever bought last week is really benefiting because they’re starting to behave irrationally again.
It is important to understand your own behavior because sometimes it is very difficult to change your old style. If my style is average, I should buy only the best stocks every time the stock falls.
i can buy
And Pidilites and most of the blue chips I should buy because then I can average because my style is that I don’t sell.
But a trader would never do that. He will also sell a blue chip stock and move into a better position. In such a situation, there will be a different strategy for him.
Behavioral science really helps you formulate your strategy and have your style, that’s the message I want to convey, so at least try to understand your behavior first.
Is there a book investors are likely to read to better understand behavioral science?
a) There are many books by foreign authors and as I told you Daniel Kahneman and Amos Tversky have written about them, but in the Indian context, about Indian stocks, there is a book about Indian history which is Value Investing and Behavioral Finance . Parag Parikh, and this is a beautiful book.
Anyone who wants to learn more about behavioral finance in the Indian market should read this book because value investing is like nothing else – again, behavioral finance teaches you because they say buy low then sell high. It is better to focus on this book and understand the Indian context.
I think this is one of the best books and this is the book we write for reference in management schools so there are other textbooks like a book by Prasanna Chandra but this book is one of the best I got
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