What Is The Psychological Approach Of Making Investment Decisions?


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Investment Decisions 3

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Psychological Approach: The Psychological approach is based on the assumption that the stock prices are guided by emotion, rather than reason. Thus the prices of stocks are believed to be influenced by the Psychological mood of the investor. Technical analysis believes that stock market movement is 10% logical and 90% psychological. Therefore, most of their tools are designed to read the Psychology of market.

If the stock market is dominated by institutional of foreign investors, operators on the wolf pack theory follow the leaders. When major money managers start to buy regardless of the reason, the price of the stock will group. Similarly, political matters, natural calamities, declaration of war also affect the prices of securities due to the different behaviors of the investors or operators.

Each of the above approach has its own limitations. Fundamental analysis approach has been associated with uncertainties, hence exclusive reliance on fundamental analysis should be avoided. Technical analysis believes that stock market movement is 10% logical and 90% psychological. Thus the mood of the investors cannot be predicted and hence, excessive reliance on technical indications can be hazardous. Similarly, psychological approach also does not have any scientific base. In this respect, Mr. N. J. Yasaswy has advised, “Never invest your money without seeking professional and objective advice from competent and experienced investment consultants. Remember that like self-medication, without proper analysis and advice can often prove to be harmful”

 

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