Like any business, our asset management and investment choices are also dictated by our ideas and are therefore subject to the risk that those ideas are fallacious. </p><div> <! - <EdIndex> -><p><img style="float: left;" src="https://news.google.com/pictures/2020/06/01/errore-denaro.jpeg" alt="error-money" width="200" />For some years, following the Great Recession, banks have been subjected to stress tests to measure their solidity. These are simulations, through which the European sector supervisor verifies that the banks themselves have not convinced themselves of the validity of their choices to an excessive extent, that is, such that they cannot stand up to the test of the facts. To err is human <strong>and of course it can also happen to the individual saver</strong>, no less than to a lender.
Psyche and investments
Ideas, it has been said, are the lenses through which we observe the world around us and everyone likes to be right. Like any business, our asset management and investment choices are also dictated by our ideas and are therefore subject to the risk that those ideas are fallacious. The prerequisite of the economy is that man is a perfectly rational being able to accurately assess each situation and then calculate which action in that context ensures the maximum profit with the least risk.
In reality, however, when it comes to investments we often run into information asymmetries, that is, we do not have all the information necessary for a truly weighted choice or we have less information than that held by counterparties looking for investors . In this case, the investment choices can be dictated by an infatuation rather than by a correct idea based on all relevant information. Behavioral economics, that branch of economic science that focuses on homo oecomomicus in conditions of information asymmetry, call this infatuation bias.
Biases to Avoid After Covid-19
An idea that works, as is an investment choice that has proven to be right, can easily lead to ‘falling in love’ with it. But an idea is only a simple hypothesis, as Karl Popper teaches, and therefore it is and remains reliable to the extent that it can be constantly tested for facts and manages to pass this test. Periods of crisis such as that determined by Covid-19 easily lead to bias due on the one hand to the natural anxiety of taking shelter and on the other hand to the difficulty of having complete information on an absolutely unprecedented phenomenon. The idea that everything has changed radically it can therefore lead to think that it is not profitable to reason in the long term for one’s investments.
Assogestioni’s data for the first few months of 2020 confirm that many did not wait to verify in concrete if long-term investments supported the contingent impact (even if not exactly short-lived) of the pandemic. As in any financial crisis, noting that other investors were also moving in a certain direction led to emulation leading to an avalanche effect that increased the abandonment of the long-term perspective. What happened is what the behavioral economy calls confirmation bias and which in a nutshell can be translated as follows: if everyone acts that way they will have a good reason to do it and therefore it is better to adapt.
Certainly not taking note of the changes in the framework within which one’s asset allocation choices were made would conflict with that risk aversion by which you invest in what appears most reliable in terms of return. In managing your portfolio, however, you must also give due weight to the time factor and therefore remember that perpetual motion does not exist. No asset can lose or take on value indefinitely, not even after the pandemic (which is not yet eradicated yet). Forgetting that nothing that is exchanged on the markets to escape trend reversals, sooner or later, leads to overconfidence. It therefore leads to believe that a choice is valid forever, whatever happens.
You invest to earn money and not to lose it, of course. But this also means taking into account as inevitable, due to the natural volatility of the markets, temporary losses in value of one’s investments. And it means above all know how to give yourself a maximum time limit within which to await the reversal of the trend, from loss to recovery of investment value.
Just in order not to make mistakes of this kind, it would be a good rule to seriously consider the solution of contacting an independent financial advisor.
To help investors who want to plan a long-term investment, Moneyfarm has made available its consultants to plan the best market entry strategy, even gradually. In addition, for those wishing to invest by 30 June 2020, there is the possibility of not paying stamp duty on all investments made during 2020.
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