Psychology of investment in dynamic market situation

Investment is often regarded as a rational process of decision making for maximizing profit and minimizing losses. This article tries to emphasis that an investment process is not a strategic, methodological or a rational process but is based on emotional responses of individual investor given a volatile platform. An entire field of study known as Behavioral finance studies the emotions behind economic decision-making. Behavioral finance is a combination of economics, psychology, game theory to model decision making by individuals. Understanding Investor psychology helps in making sound and rational decisions. The last 10 years have been difficult for investors. The US Subprime mortgage crisis, the Satyam corporate accounting fraud saga and its aftermath, business and investor caution have led to poor and volatile returns from stock market. Investing methods that seemed to have worked well for many years have seemingly made investors lose faith in the stock market due to its volatile nature. This article should help the investor prudence by understanding the whole process of the functioning of stock market, understand the market cycles of good times and bad times, investor reaction towards economic and business cycles, identifying investment opportunities and managing risks. This should reiterate that understanding investor psychology offers best defensive stance and the awareness of past market cycles should not throw the investor into surprise. It is intended to help us investors make better choices. We make choices based on what we see, hear and with pre-conceived notions which we have accumulated and demonstrated over our lifetimes. This should be a thoughtful article for improvement and for recognition of false confidence and making better investment decisions through awareness.