BEHAVIOURAL FINANCE MODULE 1 According to conventional financial theory, the world and its participants are, for the

most part, rational "wealth maximizers". However, there are many instances where emotion and psychology influence our decisions, causing us to behave in unpredictable or irrational ways. There are two kinds of decision making taken by investors in the financial market. Rational Decision Making Systematic and step by step method in which quantitative data obtained through quantitative or mathematical analysis for decision making with logical approach. Irrational Decision Making Irrational behavior arise as consequence of emotional reactions affect on taking the decisions. Irrational decisions taken by investors want to suffer huge loss in the financial market. Behavioural finance is a relatively new field that seeks to combine behavioral and cognitive psychological theory with conventional economics and finance to provide explanations for why people make irrational financial decisions.
Why is behavioral finance necessary? Finance that is based on rational and logical theories, such as the capital asset pricing model (CAPM) and the efficient market hypothesis (EMH). These theories assume that people, for the most part, behave rationally and predictably. For a while, theoretical and empirical evidence suggested that CAPM, EMH and other rational financial theories did a respectable job of predicting and explaining certain events. However, as time went on, academics in both finance and economics started to find anomalies and behaviors that couldn't be explained by theories available at the time. While these theories could explain certain "idealized" events, the real world proved to be a very messy place in which market participants often behaved very unpredictably. Conventional financial theories have failed to explain some of the Anomalies and irregularities taken place in financial Market .When money is put into the stock market, it is done with the aim of generating a return on the capital invested. Many investors try not only to make a profitable return, but also to outperform or beat the market.

CHALLENGES TO MARKET EFFICIENCY Efficient Market Hypothesis formulated by Eugene Fama in 1970, suggests that at any given time, prices fully reflect all available information on a particular stock and/or market. Thus, according to the EMH, no investor has an advantage in predicting a return on a stock price because information available to everyone at same time.

The Effect of Efficiency: Non-Predictability The nature of information does not have to be limited to financial news and research alone; indeed, information about political, economic and social events, combined with how investors perceive such information, whether true or rumored, will be reflected in the stock price. According to EMH, as prices respond only to information available in the market, and, because all market participants are privy to the same information, no one will have the ability to out-profit anyone else. In efficient markets, prices become not predictable but random, so no investment pattern can be discerned. A planned approach to investment, therefore, cannot be successful. Anomalies: The Challenge to Efficiency In the real world of investment, however, there are obvious arguments against the EMH. There are investors who have beaten the market Warren Buffet, whose investment strategy focuses on undervalued stocks, made millions and set an example for numerous followers. There are portfolio managers who have better track records than others, and there are investment houses with more renowned research analysis than others. So how can performance be random when people are clearly profiting from and beating the market? Counter arguments to the EMH state that consistent patterns are present. Here are some examples of some of the predictable anomalies thrown in the face of the EMH: January effect is a pattern that shows higher returns tend to be earned in the first month of the year; "blue Monday on Wall Street" is a saying that discourages buying on Friday afternoon and Monday morning because of the Weekend Effect, the tendency for prices to be higher on the day before and after the weekend than during the rest of the week. Studies in Behavioural finance, which look into the effects of investor psychology on stock prices, also reveal that there are some predictable patterns in the stock market. Investors tend to buy undervalued stocks and sell overvalued stocks and, in a market of many participants, the result can be anything but efficient. Degrees of Efficiency Accepting the EMH in its purest form may be difficult; however, there are three identified classifications of the EMH, which are aimed at reflecting the degree to which it can be applied to markets. 1. Strong efficiency - This is the strongest version, which states that all information in a market, whether public or private, is accounted for in a stock price. Not even insider information could give an investor an advantage. 2. Semi-strong efficiency - This form of EMH implies that all public information is calculated into a stock's current share price. Neither fundamental nor technical analysis can be used to achieve superior gains. 3. Weak efficiency - This type of EMH claims that all past prices of a stock are

reflected in today's stock price. Therefore, technical analysis cannot be used to predict and beat a market. In the real world, markets cannot be absolutely efficient or wholly inefficient. It might be reasonable to see markets as essentially a mixture of both, wherein daily decisions and events cannot always be reflected immediately into a market. If all participants were to believe that the market is efficient, no one would seek extraordinary profits, which is the force that keeps the wheels of the market turning. In the age of information technology (IT), however, markets all over the world are gaining greater efficiency. IT allows for a more effective, faster means to disseminate information, and electronic trading allows for prices to adjust more quickly to news entering the market. However, while the pace at which we receive information and make transactions quickens, IT also restricts the time it takes to verify the information used to make a trade. Thus, IT may inadvertently result in less efficiency if the quality of the information we use no longer allows us to make profit-generating decisions. . Theoretical and empirical evidence suggested that CAPM, EMH and other rational financial theories did a respectable job of predicting and explaining certain events. However, as time went on, academics in both finance and economics started to find anomalies and behaviors that couldn't be explained by theories available at the time. While these theories could explain certain "idealized" events, the real world proved to be a very messy place in which market participants often behaved very unpredictably. Homo Economicus One of the most rudimentary assumptions that conventional economics and finance makes is that people are rational "wealth maximizers" who seek to increase their own well-being. According to conventional economics, emotions and other extraneous factors do not influence people when it comes to making economic choices. In most cases, however, this assumption doesn't reflect how people behave in the real world. The fact is people frequently behave irrationally. Consider how many people purchase lottery tickets in the hope of hitting the big jackpot. From a purely logical standpoint, it does not make sense to buy a lottery ticket when the odds of winning are overwhelming against the ticket holder (roughly 1 in 146 million, or 0.0000006849%, for the famous Powerball jackpot). Despite this, millions of people spend countless dollars on this activity . These anomalies prompted academics to look to cognitive psychology to account for the irrational and illogical behaviors that modern finance had failed to explain. Behavioral finance seeks to explain our actions, whereas modern finance seeks to explain the actions of the "economic man" which is known as Homo economicus.

Contributors of behavioural finance

Like every other branch of finance, the field of behavioral finance has certain people that have provided major theoretical and empirical contributions. The following section provides a brief introduction to three of the biggest names associated with the field. Daniel Kahneman and Amos Tversky Cognitive psychologists Daniel Kahneman and Amos Tversky are considered the fathers of behavioral economics/finance. Since their initial collaborations in the late 1960s, this duo has published about 200 works, most of which relate to psychological concepts with implications for behavioral finance. In 2002, Kahneman received the Nobel Memorial Prize in Economic Sciences for his contributions to the study of rationality in economics. Kahneman and Tversky have focused much of their research on the cognitive biases and heuristics (i.e. approaches to problem solving)that cause people to engage in unanticipated irrational behavior. Their most popular and notable works include writings about prospect theory and loss aversion . Richard Thaler While Kahneman and Tversky provided the early psychological theories that would be the foundation for behavioral finance, this field would not have evolved if it weren't for economist Richard Thaler. During his studies, Thaler became more and more aware of the shortcomings in conventional economic theoryies as they relate to people's behaviors. After reading a draft version of Kahneman and Tversky's work on prospect theory, Thaler realized that, unlike conventional economic theory, psychological theory could account for the irrationality in behaviors.Thaler went on to collaborate with Kahneman and Tversky, blending economics and finance with psychology to present concepts, such as mental accounting, the endowment effect and other biases. Critics- Eugene Fama The most notable critic of behavioral finance is Eugene Fama, the founder of market efficiency theory. In fact, he notes that many of the anomalies found in conventional theories could be considered shorter-term chance events that are eventually corrected over time. In his 1998 paper, entitled "Market Efficiency, Long-Term Returns And Behavioral Finance", Fama argues that many of the findings in behavioral finance appear to contradict each other, and that all in all, behavioral finance itself appears to be a collection of anomalies . EXPECTED UTILITY THEORY Expected Utility Theory (EUT) states that the decision maker (DM) chooses between

risky or uncertain prospects by comparing their expected utility values, i.e. the weighted sums obtained by adding the utility values of outcomes multiplied by their respective probabilities. In economics game theory, and decision theory the expected utility hypothesis is a theory of utility in which "betting preferences" of people with regard to uncertain outcomes (gambles) is represented by a function of the payout (whether in money or other goods. This theory has proved useful to explain some popular choices that seem to contradict the expected value criterion (which takes into account only the size of the payout and the probability of occurrence), such as gambling and insurance. Daniel Bernoulli described the complete theory in 1738.The von NeumannMorgenstern utility theorem provides necessary and sufficient "rationality" axioms under which the expected utility hypothesis holds. PROSPECT THEORY Prospect Theory is a theory that describes decisions between alternatives that involve risk, i.e. alternatives with uncertain outcomes, where the probabilities are known. The model is descriptive: it tries to model real-life choices, rather than optimal decisions. Prospect theory was developed by Daniel Kahneman professor at Princeton Universitys Department of Psychology, and Amos Tversky in 1979 as a psychologically realistic alternative to expected utility theory. It allows one to describe how people make choices in situations where they have to decide between alternatives that involve risk, e.g. in financial decisions. Starting from empirical evidence, the theory describes how individuals evaluate potential losses and gains. In the original formulation the term prospect referred to a lottery.

The theory describes such decision processes as consisting of two stages, editing and evaluation. In the first, possible outcomes of the decision are ordered following some heuristic. In particular, people decide which outcomes they see as basically identical and they set a reference point and consider lower outcomes as losses and larger as gains. In the following evaluation phase, people behave as if they would compute a value (utility), based on the potential outcomes and their respective probabilities, and then choose the alternative having a higher utility. Kahneman and discussed several states of mind which may influence an investors decision making process. The key concepts which he discussed are as follows:

1. Loss aversion: Loss aversion is an important psychological concept which receives increasing attention in economic analysis. The investor is a risk-seekerwhen faced with the prospect of losses, but is risk-averse when faced with theprospects of enjoying gains. This phenomenon is called loss aversion10. UlrichSchmidta, and Horst Zankb11 discussed the loss aversion theory with risk aversionand he aceepted the Kahneman and Tversky views. 2. Regret Aversion: It arises from the investors desire to avoid pain of regret arising from a poor investment decision. This aversion encourages investors to hold poorly performing shares as avoiding their sale also avoids the recognition of the associated loss and bad investment decision. Regret aversion creates a tax inefficient investment strategy because investors can reduce their taxable income by realizing capital losses. 3. Mental Accounting: Mental accounting is the set of cognitive operations used by the investors to organise, evaluate and keep track of investment activities. Three components of mental accounting receive the most attention. This first captures how outcomes are perceived and experienced, and how decisions are made and subsequently evaluated. A second component of mental accounting involves the assignment of activities to specific accounts. Both the sources and uses of funds are labelled in real as well as in mental accounting systems.The third component of mental accounting concerns the frequency with which accounts are evaluated and 'choice bracketing'. Accounts can be balanced daily,weekly, yearly, and so on, and can be defined narrowly or broadly. Each of the components of mental accounting violates the economic principle of fungibility. As a result, mental accounting influences choice, that is, it matters12. 4. Self Control: It requires for all the investors to avoid the losses and protect the investments. As noted by Thaler and shefrin13 investros are subject to temptation and they look for tools to improve self control. By mentally separating their financial resources into capital and available for expenditure pools, investors can control their urge to over consume. MENTAL ACCOUNTING An economic concept established by economist Richard Thaler, which contends that individuals divide their current and future assets into separate, non-transferable portions. The theory purports individuals assign different levels of utility to each asset group, which affects their consumption decisions and other behaviors. The importance of this theory is illustrated in its application towards the economic behavior of individuals, and thus entire populations and markets. Rather than rationally viewing every dollar as identical, mental accounting helps explain why many investors designate some of their amount as "safety" capital which they invest in low-risk investments, while at the same time treating their "risk capital" quite differently. Although many people use mental accounting, they may not realize how illogical this line of thinking really is. For example, people often have a special "money jar" or fund set aside for a vacation or a new home, while still carrying substantial credit card debt. In this

example, money in the special fund is being treated differently from the money that the same person is using to pay down his or her debt, despite the fact that diverting funds from debt repayment increases interest payments and reduces the person's net worth. Simply put, it's illogical (and detrimental) to have savings in a jar earning little to no interest while carrying credit-card debt accruing at 20% annually. In this case, rather than saving for a holiday, the most logical course of action would be to use the funds in the jar (and any other available monies) to pay off the expensive debt. This seems simple enough, but why don't people behave this way? The answer lies with the personal value that people place on particular assets. For instance, people may feel that money saved for a new house or their children's college fund is too "important" to relinquish. As a result, this "important" account may not be touched at all, even if doing so would provide added financial benefit The Different Accounts Dilemma To illustrate the importance of different accounts as it relates to mental accounting, consider this real-life example: You have recently subjected yourself to a weekly lunch budget and are going to purchase a $6 sandwich for lunch. As you are waiting in line, one of the following things occurs: 1) You find that you have a hole in your pocket and have lost $6; or 2) You buy the sandwich, but as you plan to take a bite, you stumble and your delicious sandwich ends up on the floor. In either case (assuming you still have enough money), would you buy another sandwich? Logically speaking, your answer in both scenarios should be the same; the dilemma is whether you should spend $6 for a sandwich. However, because of the mental accounting bias, this isn't so. Because of the mental accounting bias, most people in the first scenario wouldn't consider the lost money to be part of their lunch budget because the money had not yet been spent or allocated to that account. Consequently, they'd be more likely to buy another sandwich, whereas in the second scenario, the money had already been spent. Different Source, Different Purpose Another aspect of mental accounting is that people also treat money differently depending on its source. For example, people tend to spend a lot more "found" money, such as tax returns and work bonuses and gifts, compared to a similar amount of money that is normally expected, such as from their paychecks. This represents another instance of how mental accounting can cause illogical use of money. Logically speaking, money should be interchangeable, regardless of its origin. Treating money differently because it comes from a different source violates that logical premise.

Where the money came from should not be a factor in how much of it you spend regardless of the money's source, spending it will represent a drop in your overall wealth. Mental Accounting In Investing The mental accounting bias also enters into investing. For example, some investors divide their investments between a safe investment portfolio and a speculative portfolio in order to prevent the negative returns that speculative investments may have from affecting the entire portfolio. The problem with such a practice is that despite all the work and money that the investor spends to separate the portfolio, his net wealth will be no different than if he had held one larger portfolio. Avoiding Mental Accounting The key point to consider for mental accounting is that money is fungible regardless of its origins or intended use, all money is the same. You can cut down on frivolous spending of "found" money, by realizing that "found" money is no different than money that you earned by working . As an extension of money being fungible, realize that saving money in a low- or no-interest account is fruitless if you still have outstanding debt. In most cases, the interest on your debt will erode any interest that you can earn in most savings accounts. While having savings is important, sometimes it makes more sense to forgo your savings in order to pay off debt. HEURISTICS AND BIASES It is often said that "seeing is believing". While this is often the case, in certain situations what you perceive is not necessarily a true representation of reality. This is not to say that there is something wrong with your senses, but rather that our minds have a tendency to introduce biases in processing certain kinds of information and events. Confirmation Bias It can be difficult to encounter something or someone without having a preconceived opinion. This first impression can be hard to shake because people also tend to selectively filter and pay more attention to information that supports their opinions, while ignoring or rationalizing the rest. This type of selective thinking is often referred to as the confirmation bias.

In investing, the confirmation bias suggests that an investor would be more likely to look for information that supports his or her original idea about an investment rather than seek out information that contradicts it. As a result, this bias can often result in faulty decision

making because one-sided information tends to skew an investor's frame of reference, leaving them with an incomplete picture of the situation. Consider, for example, an investor that hears about a hot stock from an unverified source and is intrigued by the potential returns. That investor might choose to research the stock in order to "prove" its touted potential is real. What ends up happening is that the investor finds all sorts of green flags about the investment (such as growing cash flow or a low debt/equity ratio), while glossing over financially disastrous red flags, such as loss of critical customers or dwindling markets. Hindsight Bias Another common perception bias is hindsight bias, which tends to occur in situations where a person believes (after the fact) that the onset of some past event was predictable and completely obvious, whereas in fact, the event could not have been reasonably predicted. Many events seem obvious in hindsight. Psychologists attribute hindsight bias to our innate need to find order in the world by creating explanations that allow us to believe that events are predictable. While this sense of curiosity is useful in many cases (take science, for example), finding erroneous links between the cause and effect of an event may result in incorrect oversimplificationsFor example, many people now claim that signs of the technology bubble of the late 1990s and early 2000s (or any bubble from history, such as the Tulip bubble from the 1630s or the South Sea bubble of 1711) were very obvious. This is a clear example of hindsight bias: If the formation of a bubble had been obvious at the time, it probably wouldn't have escalated and eventually burst. For investors and other participants in the financial world, the hindsight bias is a cause for one of the most potentially dangerous mindsets that an investor or trader can have: overconfidence. In this case, overconfidence refers to investors' or traders' unfounded belief that they possess superior stock-picking abilities.

Avoiding Confirmation Bias Confirmation bias represents a tendency for us to focus on information that confirms some pre-existing thought. Part of the problem with confirmation bias is that being aware of it isn't good enough to prevent you from doing it. One solution to overcoming this bias would be finding someone to act as a "dissenting voice of reason". That way you'll be confronted with a contrary viewpoint to examine. Common and illustrative example of a systematic bias is to overassign probabilities to conjunctions. Try the following: Linda is 31, single, outspoken, and very bright. She majored in philosophy in college. As a student, she was deeply concerned with discrimination and other social issues, and participated in anti-nuclear demonstrations. Which statement is more likely? a. Linda is a bank teller

b. Linda is a bank teller and active in the feminist movement. When combined with other options to throw the test-taker off, the majority of people actually pick b, even though the probability of b (a conjunction) is surely lower than the probability of a, which is a superset of b. But our minds automatically work this way. Various heuristics and biases seem to be built into the way our human mind works. Try another: Estimate the product of the series: 9x8x7x6x5x4x3x2x1=? vs. 1x2x3x4x5x6x7x8x9=? Experimental studies have confirmed that estimates are strongly biased towards the first series. In a study that required participants to give their answers within five seconds, the average estimate for the first series was 4,200, and for the second series, only 500. The real answer is 40,000. Everyone radically underestimated the real answer. This bias is called anchoring -- fixating on what comes first, and insufficiently adjusting as more data comes in. In a sales context, salespeople will often show a customer a more expensive product, then adjust downwards incrementally. This makes all the products seem cheaper, and is a very effective sales strategy that exploits universal human heuristics and biases. BAYES RULE IN HEURISTICS Bayes' rule has often been cited as a way of making predictions mathematically and normatively, freeing decision-makers from the threat of biased decisions. Unfortunately, applying Bayes' rule in everyday contexts can be difficult for those who are not explicitly trained to do so.All people (even smart ones) are affected by psychological biases. However, traditional finance has considered this irrelevant. Traditional finance assumes that people are rational and tells us how people should behave in order to maximize their wealth. These ideas have brought us arbitrage theory, portfolio theory, asset pricing theory, and option pricing theory.Alternatively, behavioral finance studies how people actually behave in a financial setting. Specifically, it is the study of how psychology affects financial decisions, corporations, and the financial markets. This book focuses on a subset of these issues-how psychological biases affect investors.

OVERCONFIDENCE AND EMOTIONS IN FINANCIAL MARKET The Investment Environment

This information is very timely because the current investment environment magnifies our psychological biases. Several powerful forces have affected investors recently. First, a strong and extended economy has created the disposable income for millions of new investors to enter the investment world. Second, this economy has spurred one of the longest and strongest bull markets in history. These new investors could have mistakenly attributed their high investment returns to their own capabilities instead of being a consequence of investing during a bull market. Finally, the rise of the Internet has led to increased investor participation in the investment process, allowing investors to trade, research, and chat online. These three factors have helped our psychological biases to flourish. These ideas are well demonstrated by the cartoon in which a roller coaster represents the modern investment environment. This roller coaster, like our stock market, has dramatic highs and lows. We go from a high to a low and back again these days at what seems like frightening speeds. Remember how you felt after your first roller coaster ride? The roller coaster causes strong emotions. Some people feel terrified while others are exuberant. Some people never ride another roller coaster, while others become addicted and wish to ride over and over again. Our new investment environment can also elicit emotions and enhance our natural psychological biases. These attributes usually lead to bad decisions. The rest of this book demonstrates these problems Not Thinking Clearly People are overconfident. Psychologists have determined that overconfidence causes people to overestimate their knowledge, underestimate risks, and exaggerate their ability to control events. Does overconfidence occur in investment decision making? Security selection is a difficult task. It is precisely this type of task at which people exhibit the greatest overconfidence. Are you overconfident? If you selected a correct range nine or more times, then you may not be overconfident. However, I have asked these questions to many groups, and no one has answered nine or more correctly. Most people are overconfident about their abilities. Consider the following question. How good a driver are you? Compared to the drivers you encounter on the road, are you above average, average, or below average? How would you answer this question? If overconfidence were not involved, approximately one-third of those reading this book would answer above average, one-third would answer average, and one-third would answer below average. However, people are overconfident in their abilities. Most people feel that they are above average. When groups of students, professors, professionals, and investment club members were asked this question, nearly everyone answered that they are above average. Clearly, many of them are mistaken and are overconfident about their skill in driving. Being overconfident in driving may not be a problem that affects your life. However, people are overconfident about their skill in many things. Sometimes overconfidence can affect your financial future.Consider this financially oriented example.

Starting a business is a very risky venture; in fact, most new businesses fail. When 2,994 new business owners were asked about their chance of success, they thought they had a 70% chance of success. But only 39% of these new owners thought that a business like theirs would be as likely to succeed.1 Why do new business owners think they have nearly twice the chance of success as others in the same business? They are overconfident. BECOMING OVERCONFIDENT We begin the process when we enter a new activity, say, investing. We do not know our ability at investing, so we observe the consequences Consider the Dartboard column frequently run by the Wall Street Journal Periodically, the Wall Street Journal invites four or five investment analysts to pick a stock for purchase. Simultaneously, they pick four or five other stocks by throwing darts at the financial pages. They follow the analysts' stocks and the dartboard stocks and report the returns produced by both sets. More likely than not, the dartboard portfolio beats the pros. Does the dart thrower have superior stock-picking ability? No, if s just that dumb luck success is common. People investing during the late 1990s probably experienced great returns-it is easy to earn high returns during a strong, extended bull market. Many new investors began investing during this period. The problem arises when the newer investors attribute their success to their ability. Thus the old Wall Street adage warning "Don't confuse brains with a bull market!".Psychologists have found that people become overconfident when they experience early success in a new activity. Also, having more information available and a higher degree of control leads to higher overconfidence. These factors are referred to as the illusion of knowledge and the illusion of control. Illusion of Knowledge People have the tendency to believe that the accuracy of their forecasts increases with more information. This is the illusion of knowledge-that more information increases your knowledge about something and improves your decisions. However, this is not always the case-increased levels of information do not necessarily lead to greater knowledge. There are three reasons for this. First, some information does not help us make predictions and can even mislead us. Second, many people may not have the training, experience, or skills to interpret the information. And, finally, people tend to interpret new information as confirmation of their prior beliefs.

To illustrate the first point, I roll a fair six-sided die. What number do you think will come up and how sure are you that you are right? Clearly, you can pick any number between 1 and 6 and have a one-sixth chance of being right. What if I told you that the last three rolls of the die have each produced the number 4? If I roll the die again, what number do you think will come up, and what chance do you have of being right?

If the die is truly fair, then you could still pick any number between 1 and 6 and have a one-sixth chance of being correct, regardless of what previous rolls have produced. The added information will not increase your ability to forecast the roll of the die. However, many people will believe that the number 4 has a greater (than one-sixth) chance to be rolled again. Others will believe that the number 4 has a lower chance to be rolled again. Both groups of people will think that their chance of being right is higher than reality. That is, the new information makes people more confident in their predictions, even though their chances for being correct do not change. What return do you think the firm TechCron will earn next year? Don't know? Last year TechCron earned 38% and it earned 45% the year before that. Now what return would you guess?Of course, TechCron is just a made-up firm, so you have no other information. But how is this example any different from rolling the die? Frankly, it is not different. Yet, investors commonly use past returns as one of the primary factors to predict the future. Have you switched your money into one of last year's best mutual funds? Investors have access to vast quantities of information. This information includes historical data like past prices, returns, and corporate operational performance, as well as current information like real-time news, prices, and volume. Individual investors have access to information on the Internet that is nearly as good as the information available to professional investors. Because most individual investors lack the training and experience of professional investors they are less equipped to know how to interpret information. They may think they have access to all this incredible inside information and that may well be true, but, without the proper training, they cannot begin to guess how that information might shape the future- any more than they can guess future rolls of the die from what was rolled in the past. The last reason information does not lead to knowledge: People have a tendency to interpret new information as a confirmation of their prior beliefs. Instead of being objective, people look for the information that confirms their earlier decisions. Consider what happens after a company reports lower earnings than expected-the price usually falls quickly, followed by high volume. High volume means that many people decided to sell and others decided to buy. Consider an earnings warning by Microsoft Corporation. Microsoft warned that earnings would be closer to a share instead of the expected. This warning was issued while the stock market was closed. What would you have done?, the opening trade for Microsoft was down $4.50 to $51 a share. When earnings information is released, prices quickly reflect the new consensus on the company. After the initial price drop, the price hardly changed at all during the next hour of trading. If you think that Microsoft is not a very good investment, then the earnings warning probably induced you to sell. However, by the time you sold, you had already lost $4.50 a share. The only reason you would have sold after finding out about the price drop is if you thought that Microsoft would not be a good investment in the future. Or you might have felt that Microsoft is a good investment and used this warning as an opportunity to buy in at a low price. A lot of people were induced to trade on this news-nearly 1.9 million shares were traded in the first 5 minutes. Over half a million shares were traded every 5 minutes during the next 25

minutes of trading. Clearly, many investors wanted to sell and many others wanted to buy. One news report caused two different behaviors.

FINANCIAL DECISION MAKING AND BEHAVIOURAL FINANCE

Decision-making is a complex activity. Decisions can never be made in a vacuum by relying on the personal resources and complex models, which do not take into consideration the situation. Analysis of the variables of the problem in which it occurs is mediated by the cognitive psychology of the manager. A situation based decisionmaking activity encompasses not only the specific problem faced by the individual but also extends to the environment. Decision-making can be defined as the process of choosing a particular alternative from a number of alternatives. It is an activity that follows after proper evaluation of all the alternatives1. They need to update themselves in multidimensional fields so that they can accomplish the desired results/ goals in the competitive business environment. This needs better insight, and understanding of human nature in the existing global perspective, plus development of fine skills and ability to get best out of investments. In addition, investors have to develop positive vision, foresight, perseverance and drive. Every investor differ from others in all aspects due to various factors like demographic factors which includes socio-economic background, educational attainment level, age, race and sex. The most crucial challenge faced by the investors is in the area of investment decisions. An optimum investment decision plays an active role and is a significant consideration. In designing the investment portfolio, the investors should consider their financial goals, risk tolerance level, and other constraints. In addition to that, they have to predict the output mean- variance optimization. This process is better suited for institutional investors; it often fails for individuals, who are susceptible to behavioural biases. In the present scenario, behavioural finance is becoming an integral part of the decisionmaking process, because it heavily influences investors performance. They can improve their performance by recognising the biases and errors of judgement to which all of us are prone. Understanding the behavioural finance will help the investors to select a better investment instrument and they can avoid repeating the expensive errors in future.The pertinent issues of this analytical study are how to minimise or eliminate the psychological biases in investment decision process.

Emergence of Behavioural Finance

The principal objective of an investment is to make money. In the early years, investment was based on performance, forecasting, market timing and so on. This produced very ordinary results, which meant that investors were showered with very ordinary futures, and

little peace of mind. There was also a huge gap between available returns and actually received returns which forced them to search for the reasons. In the examining process, they identified that it is caused by fundamental mistakes in the decision-making process. In other words, they make irrational investment decisions. In recognizing these mistakes and means to avoid them, to transform the quality of investment decisions and results, they realized the impact of psychology in investment decisions. Several years ago, the researchers began to study the field of Behavioral Finance to understand the psychological processes driving these mistakes. Thus, Behavioural finance is not a new subject in the field of finance and is very popular in Stock markets across the world for investment decisions. Many investors have, for long considered that psychology plays a key role in determining the behaviour of markets.

Behavioural Finance Principles and Its Implications

Under the traditional financial theory, the decisions makers are rational. In contrast, modern theory suggests that Investors financial decision-making are not driven by due considerations. The decisions are taken by them are also often inconsistent. Put in another way, human decisions are subject to several cognitive illusions. Heuristic Decision Process The decision process by which the investors find things out for themselves,usually by trial and error, lead to the development of rules of thumb. In other words, it refers to rules of thumb which humans use to made decisions in complex, uncertain environments. The reality, the investors decision making process are not strictly rational one. Thought the investors have collected the relevant information and objectively evaluated, in which the mental and emotional factors are involved. It is very difficult to separate. Sometimes it may be good, but many times it may result in poorer decision outcomes. It includes: 1. Representativeness: The investors recent success; tend to continue into the future also. The tendency of decisions of the investors to make based on past experiences is known as stereotype. Debont (1998)8 concluded that analyses are biased in the direction of recent success or failure in their earnings forecasts, the characteristic of stereotype decisions.

COGNITIVE ILLUSIONS

1.Over Confidence 2.Anchoring 3.Gamblers Fallacy

4.Availability Bias 1. Overconfidence: There are several dimensions to confidence. It can give more courage, and is often viewed as a key to success. Although confidence is often encouraged and celebrated, it is not the only factor to success. The investors who are cautious and analytical can achieve success and others have to withdraw. Yet, confidence, especially self-confidence, is often viewed as a positive trait. Sometimes, the investors overestimate their predictive skills or assuming more knowledge then they have. Many times it leads excessive trading. 2. Anchoring: It describes the common human tendency to rely too heavily, or anchor on one trait or piece of information when making decisions. When presented with new information, the investors tend to be slow to change or the value scale is fixed or anchored by recent observations. They are expecting the trend of earning is to remain with historical trend, which may lead to possible under reactions to trend changes. 3. Gamblers fallacy: It arises when the investors inappropriately predict that tend will reverse. It may result in anticipation of good or poor end. 4. Availability bias: The investors place undue weight for making decisions on the most available information. This happens quite commonly. It leads less return and sometimes poor results also. APPLICATIONS OF BEHAVIOURAL FINANCE IN STOCK MARKET

Robert Shiller, a professor of economics at Yale University, made a prediction in 2005 that a massive bubble was developing in the housing market, and was proved right just two years later, it seemed a mortal blow for classical finance. Shiller is one of the founders of behavioral finance, a school of economics that believes that the psychological behavior of investors can have a big impact on markets. As he had done with his earlier prescient forecast of irrational exuberance in the stock market bubble of the late 90s, Shiller seemed to be staging a direct attack on the Efficient Market Hypothesis (EMH), which University of Chicago economist Eugene Fama had developed three decades earlier. According to Fama, investors are always rational, and markets accurately reflect all publicly known information. In this utopian world, securities will always be appropriately priced, and no amount of analysis can result in outperformance. Shiller, for his part, vehemently disagrees. The Efficient Market Hypothesis is one of the most egregious errors in the history of economic thought, he says. Its a half-truth. As Shiller suggests, the financial crisis of 20082009 seems to have given a major boost to behavioral finance theory, and its advocates are not shy in declaring victory. If the argument is that people are perfectly rational, then we have won the argument, says Dan

Ariely, a professor of behavioral economics at Duke Universitys Fuqua School of Business. Yet, when the bubble burst, very few investors actually made any money from the subsequent market crash. Even funds that employ behavioral techniques to influence their investing fell sharply in 2008 along with the rest of the market. Its true that some hedge funds made huge profits betting against subprime-mortgage-backed securities, but Richard Thaler, a professor at the Booth School of Business at the University of Chicago and a founding theorist of behavioral finance, says its almost impossible to earn a living making such investments. The world isnt structured in a way that somebody could create a fund that will bet against bubbles when they appear, because youd be on the sidelines a lot of the time and youd go through really hard times, says Thaler, who works as a principal at Fuller & Thaler Asset Management in San Mateo, California, when he isnt teaching finance or doing academic research .Like Thaler, the fund managers employing behavioral finance are not betting against bubbles. Instead, they believe that investors make mistakes because of cognitive and emotional biases such as a presumption that a stock that has performed well in the past will continue to do so far into the future that cause equity prices to either overreact or underreact to market news. It is these mispricings that behavioral finance strategies attempt to exploit. Over the past 15 years, there has been a steady increase in the number of fund managers that are using behavioral finance concepts to select stocks and construct portfolios. One estimate is that half of the 200 listed small-cap value funds use some form of behavioral finance in selecting their portfolios. Such firms as Fuller & Thaler, Chicago-based LSV Asset Management and even fund behemoth J.P. Morgan Asset Management have deployed strategies that use behavioral concepts to select equities for their portfolios. And all of them are beating their market benchmarks over the long term.

MODULE 2--INVESTORS PSYCHOLOGY AND THEORIES

What drives investor behavior? We would all like to think we always behave rationally while at the same time assuming that others often do not. Most financial theory is based on the idea that everyone takes careful account of all available information before making investment decisions. Behavioral finance, a study of the markets that draws on psychology, is throwing more light on why people buy or sell the stocks they do - and even why they do not buy stocks at all. This research on investor behavior helps to explain the various 'market anomalies' that challenge standard theory. It is emerging from the academic world and beginning to be used in money management. An article by Yale finance professor Robert Shiller, which is available on his website surveys some of the key ideas in behavioral finance, including: Prospect theory. Regret theory. Anchoring. Over- and under-reaction. Prospect theory suggests that people respond differently to equivalent situations depending on whether it is presented in the context of a loss or a gain. Typically, they become considerably more distressed at the prospect of losses than they are made happy by equivalent gains. This 'loss aversion' means that people are willing to take more risks to avoid losses than to realize gains: even faced with sure gain, most investors are risk-averse; but faced with sure loss, they become risk-takers. According to the related 'endowment effect', people set a higher price on something they own than they would be prepared to pay to acquire it. Regret theory is about people's emotional reaction to having made an error of judgment, whether buying a stock that has gone down or not buying one they considered and which has subsequently gone up. Investors may avoid selling stocks that have gone down in order to avoid the regret of having made a bad investment and the embarrassment of reporting the loss. They may also find it easier to follow the crowd and buy a popular stock: if it subsequently goes down, it can be rationalized as everyone else owned it. Going against conventional wisdom is harder since it raises the possibility of feeling regret if decisions prove incorrect. Anchoring is a phenomenon in which, in the absence of better information, investors assume current prices are about right. In a bull market, for example, each new high is 'anchored' by its closeness to the last record, and more distant history increasingly becomes an irrelevance. People tend to give too much weight to recent experience, extrapolating recent trends that are often at odds with long-run averages and probabilities. The consequence of investors putting too much weight on recent news at the expense of other data is market over- or under-reaction. People show overconfidence. They tend to become more optimistic when the market goes up and more pessimistic when the market goes

down. Hence, prices fall too much on bad news and rise too much on good news. And in certain circumstances, this can lead to extreme events . Two psychological theories underpin these views of investor behavior. The first is what Daniel Kahneman and the late Amos Tversky (co-authors of prospect theory) call the 'representativeness heuristic' - where people tend to see patterns in random sequences, for example, in financial data. The second, 'conservatism', is where people chase what they see as a trend but remain slow to change their opinions in the face of new evidence that runs counter to their current view of the world. The ideas of behavioral finance apply as much to financial analysts as they do to individual investors. For example, research indicates that professional analysts are remarkably bad at forecasting the earnings growth of individual companies. Indeed, it seems that forecasts for a particular company can be made more accurately by ignoring analysts' forecasts and forecasting earnings growth at the same rate as the average company. The underlying reasons for the abject failure of the professionals are classic behavioral finance: they like to stay close to the crowd; and their forecasts tend to extrapolate from recent past performance, which is very often a poor guide to the future. There is evidence that institutional investors behave differently than individuals, in part because they are agents acting on behalf of the 'ultimate' investors. Compensation devices like profit-splitting schemes seek to align the interests of principals with their agents portfolio managers and other advisers - but still differences persist. For example, agents may be reluctant to take risks - even when probabilities strongly suggest they should for their clients' interests - when the risks are small but real that they might be fired. Similarly, agents tend to favor well-known and popular companies because they are less likely to be fired if they underperform. Stock analysts as a group engage in herd behavior in part because they are constantly evaluated against their, though research does suggest that when forecasting earnings, young analysts tend to try to fit in with the crowd - even if the crowd is wrong - more than older ones. This is probably because a few notable failures can destroy reputations. When analysts are older and more established, it is possible that they face less risk in pursuing an independent line of thought. Santa Clara finance professor Meir Statman makes the case for behavioral finance when he writes: 'Standard finance is so weighted down with anomalies that it makes much sense to continue the reconstruction of financial theory on behavioral lines. Proponents of standard finance often concede that their financial theory does poorly as a descriptive or positive theory of the behavior of individuals. They retreat to a second line of defense: that standard finance does well as a descriptive theory of the equilibrium that results from the interaction of individuals in the markets. But even the second line of defense does not hold. Evidence is mounting that even the 'capital asset pricing model' (CAPM), the market equilibrium theory by which risk and expected returns are determined in standard finance, is not a good description of reality.' Principle Advances in CAPM/Asset Pricing 1. Behavioral Finance gains importance in asset pricing. 2. Liquidity risk is becoming an important variable in asset pricing.

3. Higher order moments/co-moments constitute significant variables in asset pricing models. 4. Investors require a risk premium for assets with higher private information.

FINANCIAL MARKET ANAMOLIES It is a price and/or return distortion on a financial market. It is usually related to:

structural factors (unfair competition, lack of market transparency. Behavioral biases by economic agents It sometimes refers to phenomena contradicting the efficient market hypothesis. There are anomalies in relation to the economic fundamentals of the equity, technical trading rules, and economic calendar events.

Anomalies could be Fundamental, Technical or calendar related. Fundamental anomalies include value effect and small-cap effect (low P/E stocks and small cap companies do better than index on an average. Calendar anomalies involve patterns in stock returns from year to year or month to month, while technical anomalies include momentum effect. In the non-investing world, an anomaly is a strange or unusual occurrence. In financial markets, anomalies refer to situations when a security or group of securities performs contrary to the notion of efficient markets, where security prices are said to reflect all available information at any point in time.With the constant release and rapid dissemination of new information, sometimes efficient markets are hard to achieve and even more difficult to maintain. There are many market anomalies; some occur once and disappear, while others are continuously observed.Can anyone profit from such strange behavior? We'll look at some popular recurring anomalies and examine whether any attempt to exploit them could be worthwhile. Calendar Effects Anomalies that are linked to a particular time are called calendar effects. Some of the most popular calendar effects include the weekend effect, the turn-of-the-month effect, the turnof-the-year effect and the January effect

Weekend Effect: The weekend effect describes the tendency of stock prices to decrease on Mondays, meaning that closing prices on Monday are lower than closing prices on the previous Friday. For some unknown reason, returns on Mondays have been consistently lower than every other day of the week. In fact, Monday is the only weekday with a negative average rate of return Years Monday Tuesday Wednesday Thursday Friday

1950-0.072% 0.032% 0.089% 2004

0.041%

0.080%

Turn-of-the-Month Effect: The turn-of-the-month effect refers to the tendency of stock prices to rise on the last trading day of the month and the first three trading days of the next month. Years 1962-2004 Turn of the Month 0.138% Rest of Days 0.024%

Turn-of-the-Year Effect: The turn-of-the-year effect describes a pattern of increased trading volume and higher stock prices in the last week of December and the first two weeks of January. Years 1950-2004 Turn of the Year 0.144% Rest of Days 0.039%

January Effect: Amid the turn-of-the-year market optimism, there is one class of securities that consistently outperforms the rest. Small-company stocks outperform the market and other asset classes during the first two to three weeks of January. This phenomenon is referred to as the January effect. Occasionally, the turn-of-the-year effect and the January effect may be addressed as the same trend, because much of the January effect can be attributed to the returns of small-company stocks.

Why Do Calendar Effects Occur? So, what's with Mondays? Why are turning days better than any other days? It has been jokingly suggested that people are happier heading into the weekend and not so happy heading back to work on Mondays, but there is no universally accepted reason for the

negative returns on Mondays. Unfortunately, this is the case for many calendar anomalies. The January effect may have the most valid explanation. It is often attributed to the turn of the tax calendar; investors sell off stocks at year's end to cash in gains and sell losing stocks to offset their gains for tax purposes. Once the New Year begins, there is a rush back into the market and particularly into small-cap stocks. Announcements and Anomalies Not all anomalies are related to the time of week, month or year. Some are linked to the announcement of information regarding stock splits, earnings, and mergers and acquisitions

Stock Split Effect: Stock splits increase the number of shares outstanding and decrease the value of each outstanding share, with a net effect of zero on the company's market capitalization. However, before and after a company announces a stock split, the stock price normally rises. The increase in price is known as the stock split effect.Many companies issue stock splits when their stock has risen to a price that may be too expensive for the average investor. As such, stock splits are often viewed by investors as a signal that the company's stock will continue to rise. Empirical evidence suggests that the signal is correct. Short-Term Price Drift: After announcements, stock prices react and often continue to move in the same direction. For example, if a positive earnings surprise is announced, the stock price may immediately move higher. Short-term price drift occurs when stock price movements related to the announcement continue long after the announcement. Short-term price drift occurs because information may not be immediately reflected in the stock's price. Merger Arbitrage: When companies announce a merger or acquisition, the value of the company being acquired tends to rise while the value of the bidding firm tends to fall. Merger arbitrage plays on potential mispricing after the announcement of a merger or acquisition.The bid submitted for an acquisition may not be an accurate reflection of the target firm's intrinsic value; this represents the market anomaly that arbitrageurs aim to exploit. Arbitrageurs aim to take advantage of the pattern that bidders usually offer premium rates to purchase target firms..

Superstitious Indicators Aside from anomalies, there are some nonmarket signals that some people believe will accurately indicate the direction of the market. Here is a short list of superstitious market indicators:

The Super Bowl Indicator: When a team from the old American Football League wins the game, the market will close lower for the year. When an old National Football League team wins, the market will end the year higher. Silly as it may

seem, the Super Bowl indicator was correct more than 80% of the time over a 40year period ending in 2008 . However, the indicator has one limitation: It contains no allowance for an expansion-team victory.

The Hemline Indicator: The market rises and falls with the length of skirts. Sometimes this indicator is referred to as the "bare knees, bull market" theory. To its merit, the hemline indicator was accurate in 1987, when designers switched from miniskirts to floor-length skirts just before the market crashed. A similar change also took place in 1929, but many argue as to which came first, the crash or the hemline shifts.

The Aspirin Indicator: Stock prices and aspirin production are inversely related. This indicator suggests that when the market is rising, fewer people need aspirin to heal market-induced headaches. Lower aspirin sales should indicate a rising market. These effects are called anomalies for a reason: they should not occur and they definitely should not persist. No one knows exactly why anomalies happen. People have offered several different opinions, but many of the anomalies have no conclusive explanations. There seems to be a chicken-or-the-egg scenario with them too - which came first is highly debatable.

Profiting From Anomali It is highly unlikely that anyone could consistently profit from exploiting anomalies. The first problem lies in the need for history to repeat itself. Second, even if the anomalies recurred like clockwork, once trading costs and taxes are taken into account, profits could dwindle or disappear. Finally, any returns will have to be risk-adjusted to determine whether trading on the anomaly allowed an investor to beat the market. INVESTORS PSYCHLOLOGICAL PROBLEMS
THE PSYCHOLOGY OF INVESTORS.

Since generation ago, stock market analysts have come to recognize that psychological factors can play a more crucial role in determining the direction of the share prices .However studies have found that, psychological factors alone cannot send the share price

to the moon and then push them down to the Precipice. Economic factors, as well as political factors also play a crucial role in determining the share price. Kahneman (1974) pointed out that people are prone to cognitive illusions, like becoming rich and famous or being able to get out of the market before a bubble breaks. People exaggerate the element of skill and deny the role of chance in their decision making process. People are often unaware of the risky they take Add loss aversion to the mix and its no wonder the average investor panics in a market downturn, a time perhaps to buy rather than sell. According to him, human beings are born optimists. This is precisely the reason why the casino is crowded twenty four hours a day with luck-seekers. It is the optimistic human nature that tempts investors to buy stocks and shares when their market prices have reached historic high. At this euphoric market condition, investors should be selling their stock and shares. Kent, Hirshleifer and Siew (2002), in their study found that research on the psychology of investors was done by looking on the relationship between stock returns and variables on factors such as the weather (Hirshleifer and Shumway, 2001), biorhythms (Samstra, Kramer and Levi,2001) and societal happiness (Boyle and Walter, 2001). These diverse investigations are motivated by emerging theories in psychological economics on visceral factors and the risk as feeling perspective. Visceral factors are the wide range of emotions, moods and drive states that people experience at the time of making decision. The risk-as-feeling perspective argued that these visceral factors could affect, and even override, rational cogitations on decisions involving risk and uncertainty. This creates predictable patterns in stock returns because people in good moods tend to be more optimistic in their estimates and judgments than people in bad moods (Wright and Bower, 1992, in Kent et al, 2002). In relation to stock pricing, the optimistic or pessimistic judgment about the future prospects from the business direction are widespread, stock prices should be predictably higher at times when most investors are in good moods than times they are in neutral or bad moods.It was found that weather variables affect an individuals emotional state or mood, which creates a predisposition to engage in particular behavior. It is also found that people have mood variations based on the seasonal variations in the hours of sunlight in the day; the so-called Seasonal Affective Disorder (SAD) Fast movement of prices of the stocks and shares in the stock market is largely due to the investors perceptions such as (i) investors perceptions of value; (ii) Investors perception on the management of risk and return (iii) investors trading practices.

i.Perceptions of Value

Perceptions of value depend on mental frames that are socially shared through stories in the news,media, conversation, and tips from friends or financial advisors (Shiller, 1990). Many people cannot distinguish good stocks from good companies. Thus, companies that appear on the cover of major business magazines are seen as excellent investments while companies that report losses seem inherently unattractive. On average, highly reputed companies seem overpriced. According to De Bondt (1998), the underlying problem is that too many people are short-term orientated and judge a book by its cover. Therefore, their valuation always leads to mispricing. ii, Managing risk and return Studies found that small individual investors avoid the danger of risk by keeping hefty portion of their financial wealth in risk-less assets even though equity shares offer more impressive long-run return. This usually related to risk averse individuals. However, it is commonly believe that aggressive investors ought to hold a higher ratio of stocks. iii, Trading practices Many investors have a psychological disposition to realize gains on past winner stocks early and an aversion to realize losses. Traders use a variety of rules and commitment techniques to control emotion. Many individuals trade shares on impulse or on random tips from acquaintances, without prior planning. One reason is that people are unjustifiably optimistic about almost everything that concerns with their personal life (). Another problem, mentioned earlier, is that trader sentiment trails the market. As a result, investors are inclined to buy shares in bull markets and sell shares in bear markets. Finally, reference points play a major role in trading behavior. They are performance benchmarks. The original purchase price can be their salient reference point. . INVESTORS PSYCHLOLOGICAL PROBLEMS There are several Psychlological problems faced by investors in stock and forex market for taking decisions. Following are the given below 1.Blindly follow the trend - one of Psychological Problems: passive currency by many complex factors, which follow the trend of Mental Health .Investors such feelings, to see other people have bought a currency, they fear behind, in ignorance of the situation, also bought a currency he does not know. 2, Indecisive - With this investment investor psychology, in the sale of a currency or stock before a plan was formulated which can not form a good portfolio. From this, indecisive psychology mainly at critical moments, can not make judgments, missed opportunities. 3, No desire just - Investors who wish to obtain investment income is only reasonable, but not so much, and sometimes, the failure of investors is caused by excessive greed. 4, A gambling mentality currency investors always want just one day fortune. They can not

wait to catch one or a few a currency, so its a big profit, they profit when investing in currency markets, most will be triumphalist, as frequently as the gambler filling, wait for them to put their properties and lives are encumbered to the currency up until the cleaners so far. When the foreign exchange market failure, they often hesitate to Last Stand, all the funds invested in some kind of currency, most of these people end up bankrupt end. 5, Specifically Of course the market will reward investors with high undesirable consequences, but would like to join wholeheartedly in the stock price low and flat, and sometimes may not be sure there are good returns. "Cheap things are not good goods" and, of course there are exceptions 6, Hesitant - Some investors have been booked in advance investment plans and strategies, but the reality of a currency into the market, he was influenced by the external environment. For example, the pre-determined prices continue to fall as a currency when they buy immediately, but one look at the market, and everyone in the sell-off, he bought a currency hand and then shrink back. Some people simply do not plan to buy a currency that is only when the people were panic buying, he is also tempted. 7, The courage to lose not to win - Remember to enter the currency markets, first of all be confident. Many investors buy a currency, buying up some time later, they wait to sell out of profits. They believe that only installed pocket money be considered safe. But they ignore the reasonable value of a currency. . 8, Unnecessary panic - Some investors of a currency due to certain environmental factors and the "road news" effect on the foreign exchange market or the future of a currency lost some confidence in panic, so on the hard sell in the hands of a currency. Many foreign exchange on the experience shows that panic is often unnecessary false alarm. Of course, in unusual times (such as war, economic crisis, etc.) seems to be expected and showed. 9, After some investors to buy a currency, the indifferent run its course, go on. Sometimes discretionary manipulation of their friends or broker, he has little involvement. This is the general trend in the foreign exchange in the case, you can also earn some money, if it is in a downward trend, as it inevitably lose everything. .

Timing the market is probably the most difficult thing to do no matter how much you know about investing it always seems to work out exactly the way you didnt want it to happen. Here is a graph about the typical investor behaviour that always ends up losing us money. Before buying or selling stocks take a look at this graph whether or not you are going to make one of the worst money mistakes of your life!