This is a presentation by Investor Buying Behavior Consultant Mawunyo Adjei pointing out emotionally driven financial decisions of Investors. It also includes ideas on how to control emotional investing.

1. BY: MAWUNYO ADJEI.

2. Why Do Investors Buy Into The Stocks They Do?

3.  Investor Buying Behavior simply involves studying
why investors buy into the stocks or businesses they
do.
 Investor Buying Behaviorists believe there is so
much to stock market investing than just
Mathematics.

4. Instead of trying so hard to study the charts
and trends of the market, why not study the
people that make up the market?
Warren Buffett once said “If Algebra and
Calculus is what is required to be a great
investor, I’d have to go back to delivering
newspapers.”

5. 1. Investors hate losses more than they love
gains
2. Price history plays an influential part in the
minds of investors especially on decisions
regarding buying or selling
3. Given any access, investors are likely to have
a quick look at their portfolio’s performance.

6. 4. As investors, we tend to hold onto our
confidence when a stock in our portfolio
plunges but we often sell too early when the
stock begins to recover.
5. We keep buying when the market is at manic
highs and sell when the market is at depressive
lows.
6. When we recently profited from a stock’s
surge in share price, we are more likely to buy
into a similar stock.

7. 7. In the business of investing, trusting the
numbers is more rewarding than trusting the
people.
8. Almost every investor believes he or she is
better at stock picking than most people.
9. We all believe we can outperform the
market.

8.  Investor Buying Behavior was coined from
Behaviorism which was started by J.B. Watson.
 J.B. Watson emphasized the importance of
Observation in studying behavior.

9.  Behaviorism studies the relationship between
stimulus and response.
 The types or theories of Behaviorism include:
Cognitive learning, Observational Learning,
Operant learning, Classical conditioning and
Insightful learning.

10.  Cognitive Learning: Involves mental
processes such as thinking, knowing,
problem solving, remembering, and forming
mental representations.
If you are scrolling through hundreds of
public companies, the stocks you will stop to
click are the ones which remind you of
something or create an image in your mind.

11. A type of cognitive learning called Insight Learning also
involves sudden realization or recognition of previously
unseen relationships.
I call it the “How come I never noticed.”

12. An investor may skip a particular stock which perfectly
fits into his investing strategy for a very long time
probably because he is too busy focusing on other stocks
outside his circle of competence, till he finally stumbles
upon the stock and gains a new insight.
Anytime we are faced with a decision, we are likely to
use the same old approach.

13.  Observational Learning: It involves changing
your behavior in order to adjust or conform
to a model’s behavior.
This is very common in Wall Street.

14.  A billionaire investor with a great following
buys equity in a stock and publicly explains
the reason for his position.
The investing public who perceive him as a
model are likely to follow suite or buy a similar
stock in that industry.

15.  Operant Conditioning: It is based on reward
and punishment.
We tend to repeat more of what we get
rewarded for and we tend to avoid what we get
punished for.
Investment strategies that are rewarded are
likely to be repeated.

16. Also, if an investor buys a Paper-
manufacturing stock which plunges and buys
another Paper-manufacturing stock which
plunges, he or she may completely stay away
from such industry for a long time.
We are likely to sell a stock if we get punished
with a stock price fall.

17.  If an investor buys a stock out of
overconfidence and almost becomes
bankrupt as a result of that particular
investment, he or she may stay away from
that industry for a very long time
 But if an investor gets rewarded with a stock
price surge for buying a stock, he or she may
focus on stocks with such similar qualities.

18.  Classical Conditioning: Learning to associate
between two events and its guaranteed
outcome can be a goldmine.
 For instance; a short seller finds out that
anytime top executives leave a company
within a specific time frame, the stock price
plunges for a very long time.

19.  So anytime there is announcement of top
executives leaving, investors become
concerned and the short seller shorts.
However, after a series of successful pairings,
the short seller may short even when he hears
rumors of executives leaving a company.
 NB: Always wait for the meat to be presented.

20.  A major meat (unconditioned stimulus) that
makes investors salivate unconsciously is “share
price”.
 An investor may have associated that anytime he
bought into a mid-cap Textile stock trading
below $10, the stock rallied within a short-term.
He chalks a series of success with this strategy.
Thereafter, anytime he sees a mid-cap Textile
stock trading below $10, his hands get itchy to
buy without making the necessary research that
he would make for any other stock.

21.  The greatest investments are often the ones we don’t
make: Gaining knowledge of your emotionally-driven
financial decisions can help you to better control your
buying behavior.
 Monetizing from investors’ behavior: Behavioral
Investors lead the flock of investors by going ahead of
them to where the greener pastures are or simply by
predicting investors’ response.

22. Psychologists identify certain judgemental
evaluation and rating errors in appraisal.
1. Error of Central Tendency: Is when the stock
picker is reluctant to assign high or low
ratings to stocks he or she is researching
on. In such a mood, a stock picker will not
buy stocks because he perceives all the
available options to be average.

23. 2. Leniency/Strictness Error: A stock picker is
likely to buy or short in this state because he
assigns very high or very low ratings to the
stocks under study.
 3. Halo Error: The tendency to focus on one
aspect of a stock’s performance and allow it
to influence your buying decision.
For instance focusing solely on the stock price
or business model and ignoring accounting
errors or management’s integrity problem.

24. 4. Recency Error: Most stock traders fall prey to
this rating error. We rate a stock’s future
performance by its recent performance.
Thus, we buy when the price is rising hoping it
will keep rising in the near-future.
5. Contrast Error: Is when a stock’s
performance rating is based on comparison
with another stock just previously evaluated.

25.  6. Similar-to-me Error: This can be a good
error because you only buy into stocks within
your circle of competence or companies you
know.
With this, the stock picker inflates the
evaluation of a stock due to a mutual personal
connection. If a listed company has the same
name as your nickname in high school, you are
very likely to give it a biased attention.

26.  Overconfidence Bias: Putting so much faith in
a stock or one’s stock picking prowess. It is a
too-sure-to-fail investing bias.
Predicting the likelihood of a stock’s
performance should not be by gut-feeling but
by relevant facts. Investors often falsely believe
they can pick investments better than most
people.

27.  Confirmation Bias: Being on the lookout for
arguments or information that backs your
perspectives.
It involves subtly focusing on stock ratings or
media articles that confirm or support your
stock picks, investment approach or financial
projections.

28.  Recency Bias: Using present situations, events
or performance to predict future
performance.
Judging a stock’s long-term performance by
its wonderful results in recent times instead of
years of consistency.

29.  Survivorship Bias: Drawing conclusions from
companies that have become successful and
then ascribing reasons for their success.
This is a good bias.

31. FOR ENTREPRENEURS & EXECUTIVES

32.  HOW DOES IT MAKE ME MONEY?

33. 1. Investors buy into opportunities.
2. Investors buy to increase their money
 The main difference between investors and
philanthropists is that investors expect
monetary returns on their investments
 The number one person CEOs should be
working for is their shareholders or investors.

34.  Give participants a long list of company
names in no particular order. Participants are
to click on just one, read the details about the
company and do a presentation about the
chosen company.
Find out the factors that made them click on
the companies they did.