Beware of framing, as it affects behavior

Is the glass half-full or is it half-empty? We have grown up with this question. It is said that an optimist sees the glass half-full, whereas a pessimist sees it otherwise.

However, look at the other way. Instead of just seeing the glass, what would happen if you have to explain about this point on optimism/pessimism to someone? Psychologists have done various experiments on questions similar to this and concluded that the way you present a message can change its interpretation.

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What you need to invst in equity markets - well, apart from money, time and knowledge ...

Below is the link to one of my old articles - published in Mumbai Samachar

http://www.bombaysamachar.com/frmStoryShow.aspx?sNo=29199

The English translation is as under:

Mental fitness

Last week when the Sensex made a two-year low, I received a sarcastic SMS from a friend: “New SEBI rule from today: If you want to trade in stock markets or the derivatives markets, additional documents must be submitted along with your PAN card and KYC documents. These new documents include cardiograph, your blood pressure readings and fitness certificate from a doctor.”

This conveys the amount of stress that the stock market movements can cause to common men.  Money has a profound impact on our mental state.

I have always wondered: I thought we invest our money to get peace of mind, but one has seen many losing the peace of mind after investing. In fact, there have been cases of suicide linked to losses incurred in the stock and derivatives markets. This is very disturbing. Why should someone get into something that leads to such a tragic end?

Does it mean stock markets are bad? No, not really. It is like railway tracks. There have been many cases of people losing lives while crossing railway tracks instead of using the foot over bridge. Does it mean railway tracks are bad?

In majority of such cases, the mechanism – be it stock markets or railway tracks – are made for certain purpose. If one misuses the system, one should be ready to pay for the consequences.

The other day, one gentleman was talking to his friends about the stock markets and compared the stock market with a casino. Very often, such phrases are used only because there are some misunderstandings prevailing about the stock markets.

So let us understand what exactly is the function of the stock market. As the name suggests, it is a marketplace where buyers and sellers meet and exchange their stocks or money. The stock market’s function is to provide a platform where such transactions happen smoothly and very efficiently, at the same time keeping the transaction costs as low as possible. Once such a platform is available, the stock market is neutral. It does not know or care how one uses this facility. It is available for the transactions.

Whether someone buys it cheap or costly; whether someone sells it cheap or costly – the market is neutral. It does not care at what price the transaction happens since it allows each individual to take a decision to buy or sell at the prevailing price. The transaction price is arrived at jointly by all the participants and is a function of the demand-supply situation. The market does not determine the transaction price.

The demand-supply situation is a function of the information processed by the various buyers and sellers. This is where the responsibility of proper assessment of information lies with the person who transacts.

The stock market provides a platform for the transaction and ensures that the cost of transaction remains low.

One would be better off treating the market only as a market – a place for carrying out the transactions. Why one is selling or buying depends on an individual’s view on the particular security.

We come back to the initial paragraphs. If we understand the function of the market, it means that the responsibility of the decision and its consequences lies only with us. Taking these decisions requires mental toughness since at any time, there will be people who have different views – some optimistic and some pessimistic. The success in investing comes when one can take decisions with a calm state of mind. To get a better perspective, please read the story of “Mr. Market” from the book “Intelligent Investor” by Benjamin Graham.

Hence, I would make a simple change in the SMS we spoke about in the first paragraph: One does not need a cardiograph or blood pressure report; one needs a mental fitness certificate. One needs to develop better abilities to take proper decisions to succeed in the world of investing.

Happy investing!

Amit Trivedi

The author runs Karmayog Knowledge Academy. The views expressed are his personal views. He can be reached at amit@karmayog-knowledge.com.

Amit has authored a book "Riding The Roller Coaster - Lessons from financial market cycles we repeatedly forget. The book is available in two languages - English and Gujarati.

Equity investments simplified - my chat on Moneycontrol

I would be doing a chat session on www.moneycontrol.com today at 4 PM, answering questions on investment in mutual funds and planning your investments

Beware of market reports! - from the archives

This one is from the archives. I wrote this in March 2010.


Do you consider market reports as advice or do you treat them just as a piece of reporting? Investment expert Amit Trivedi guides you.

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#RidingTheRollerCoaster 

Stupid or victim - which feels better? - My article on www.moneycontrol.com

Investors get carried away by short term performance of asset classes. After the expected returns do not materialise, there is a tendency to blame the external factors such as advisor's influence than lack of home work by the investor himself.

Read more at: Stupid or victim - which feels better

Seven point prescription for investors in 2015 - my article on www.moneycontrol.com

This is again that time of the year when the business and investment world considers doing the following:
1. Looking back at the year gone by 
2. Preparing a list of resolutions for the coming year
3. Predicting what lies in store in the coming year

Let us also indulge into the same exercise.

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Invest right

“It seems India becomes very risky in the months of February and March every year.” A friend loved to say this. 

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Lessons for the IFA from airline safety announcements

IFAs can draw lessons on how to alert and caution investors from airline safety instructions. 

Read on to find how…

A Dozen Things I’ve Learned About Investing from Daniel Kahneman - a blog post by Tren Griffins

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How will market behave on election results day?

It is very difficult for one to gauge the mood of the voters. However, many market participants tried exactly that. And what do they get?

Read more at: http://www.moneycontrol.com/news/market-outlook/how-will-market-behaveelection-results-day_1080770.html?utm_source=ref_article

First impression

The other day, I was watching TV with my 4 year old son. The program was one of his favourite game shows. When one of the participants entered, my son asked me whether he will win. I did something I normally refrain from doing. I tried to predict whether the participant would win. I thought he would not and told my son so.

Later, I was replaying the whole experience and tried to understand what made me think whether the player would win. The answer was very simple and yet shocking. But before going to the answer, let us understand what one knew about the game. This is one of the game shows that my kids love to watch and hence I have also watched it very often.

My prediction was largely based on what I had seen of various participants – some won and some did not. One was trying to correlate certain “first impressions” with the player’s ability to win. And what does one see in less than half a minute? It is the body posture, the confidence – lack of it, enough of it or overconfidence, mannerisms, etc. – broadly a combination of body language and the appearance. And I knew the answer why I thought the participant would lose. His mannerisms exhibited arrogance and lack of seriousness. And I do not like arrogance.

This is what you call first impression. The mind judges through the first impression. It processes the immediately available information and jumps to a conclusion.

Well, what happened in case of the game show was quite harmless, but when decisions are taken with such biases, sometimes they may turn out to be very costly.