Do investors fail because of 'lizard brains'?
In this issue:
» Funding the CAD gap a big worry for India
» Stock markets give thumbs up to Infy June quarter result
» Why has the global recovery failed?
» Why a good monsoon should make you worry?
» ...and more!
00:00 |
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A question that comes to mind is- Why are financial markets behaving so irrationally? We came across a very interesting article in PBS Newshour that gives a biological explanation to the madness of the markets. The article highlights the views of a gentleman called Terry Burnham who is the author of books such as "Mean Genes" and "Mean Markets and Lizard Brains".
Mr Burnham believes that the US stock markets are going to witness a "devastating decline". What's his reasoning behind this view? He believes that there are very clear signs of an impending collapse. But then why are investors not able to see it? As per him, the problem is with the way our brains our wired. In two words, the answer is 'lizard brains'.
Let us explain what he means by 'lizard brains'. The term is casually used to refer to the most primitive part of the human brain. The lizard brain evolved in a way that suited its survival needs in a certain environment. But many of its responses are irrelevant in our modern social structures. And in the context of stock markets, lizard brain responses can actually be very dangerous.
As Mr Burnham points out, your lizard brain is programmed to find and act on patterns. So if a certain thing seems to have worked earlier, the lizard brain tries to replicate the same again. Let us extend this theory to stock investing. Say there is a stock that you really like. And you see it soaring up continuously. Other investors are optimistic about the stock. They seem to be making a lot of money on it.
What does your primitive brain do? It identifies a pattern that seems to be working successfully. And the next thing you want to do is go and buy the stock. No matter what the price is! The lizard brain propels this self-fulfilling prophecy. Until of course, you hit the wall. We believe this very well explains the reason why most investors fail.
Do you think your 'lizard brain' impacts your investing decisions? Please share your comments or post them on our Facebook page / Google+ page
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01:30 |
Chart of the day | |
Since May 2013, FIIs pulled out about US$ 8.15 bn in Indian debt. So it is quite clear that attracting 'hot money' is not a solution to India's CAD problems. Therefore, it is imperative for Indian policymakers to initiate long term measures to remedy our deficit problems and to save the Indian rupee from plunging further down.
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Data source: DNA |
02:07 |
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One reason is that the decline is not as bad as what the street expected. Another reason could be the company reiterating its guidance for the entire year. In any case, such exuberance is nothing but a short term affair. The IT industry is facing headwinds which are likely to continue in the short to medium term. In addition to this, there is a chance that the margins for the company would come under pressure due to the wage hikes. But all of these issues are short to medium term in nature. As long as the long term outlook for the sector as a whole and for the company in particular remains strong, there is little to worry about. Long term investors would do well to not read too much into short term spikes and falls based on quarterly results.
02:43 |
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Lastly, the authorities should not forget that just as Christianity is not possible without hell, there can't be capitalism without bankruptcy. Weak and inefficient firms, no matter how big they are, will have to be weeded out of the system. Only then real recovery will take place as per us.
03:18 |
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04:30 |
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04:50 |
Today's investing mantra |
Today's Premium Edition.
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