Behaviorist economics is a branch of economics that attempts to explain the decision-making process of all human actions or choices by applying economic theory and methodology rather than psychology. Traditional mainstream economics assumes human reason or rationality, so there is a slight gap from our lives, which have many irrational factors. So what emerged is behaviorist economics, and this school argues that various factors such as emotions (especially loss avoidance) should be considered rather than rational human judgment. So let's take a look at the attitudes that investors should have from this behaviorist economics perspective.
Why do investors hate losing money?
Have you heard of the word loss avoidance tendency? People are more sensitive to losses than to profits, which is called a loss avoidance tendency. For example, if you take 1 million won and get 10% revenue, you get 1.1 million won, but if you take -10% loss, you get 900,000 won. Although it is the same amount, the former has a positive effect of +10%, but the latter has a negative effect of -10%, which is much more damaging. So most people make decisions in a way that benefits them even a little bit, and that's the tendency to avoid losses.
Are humans always rational?
As I mentioned earlier, in activist economics, human nature is by no means reasonable. A typical example is the sunk cost effect. It refers to a phenomenon that continues to cling to even though it has already been spent and is irrecoverable, and in the stock market, there are many cases where they can't sell their hands. However, in the end, the opportunity to recover the principal will be missed, and on the contrary, it will cause a huge loss. Of course, it doesn't matter if you take a long-term holding strategy like value investment, but it can be a fatal weakness for traders who take a short-term trading strategy.
Then what should I do?
Both of the above cases should be avoided because they are wrong trading methods. First of all, if you go back to the first case and are confident that your stock is likely to rise in the future, you need to make a bold decision to sell your hands and transfer to another stock. And in the second case, too, if you had analyzed enough before every purchase, you wouldn't even have entered the first place. That's why we need to break the habit of pressing the buy button on impulse without prior analysis.