We are used to thinking that our decision is influenced only by facts and some pieces of crucial information. Taking them into account, we are more likely to make the correct decision. Is it really so?
Researchers at the Massachusetts Institute of Technology have conducted a study on the demographics of people that feverishly sell stocks during a market crash.
As it turns out, investors who are male over the age of 45, married, or consider themselves as having "excellent investment experience" are more likely to freak out and dump their portfolios during a downturn. These are the conclusions of the research published last month. Overall, researchers have analyzed more than 600,000 brokerage accounts.
In the study, the researchers defined a panic sale as a drop of 90% of a household account's equity assets within one month. Notably, 50% or more is related to trades.
"Financial advisors have long advised their clients to stay calm and weather any passing financial storm in their portfolios. Despite this, a percentage of investors tend to freak out and sell off a large portion of their risky assets," Daniel Elkind, Kathryn Kaminski, Andrew Lo, and colleagues wrote.
The latest and previous studies have shown that people are better off keeping a broadly diversified portfolio. Nevertheless, the prospects of wealth and the fear of losing it lead to hectic trading patterns.
"Panic sales are not random events." The researchers said that they could identify clear trends in the data. They found out that specific types of investors, e.g. those with less than $20,000 in their portfolio, are also willing to liquidate more often.
"Subtle patterns in portfolio history, past market movements, and demographic profile can be exploited by deep neural networks to accurately predict if an investor will panic sell in the near future," they pointed out.
Extreme emotional swings of an investor in the stock market have long fascinated behavioral scientists.
At the same time, researchers at the Massachusetts Institute of Technology did not study why exactly investors are panic-selling. Any trader has at least once experienced such feelings as a strong fear and desire to give up and leave the market at critical moments. In any case, it makes sense to study the Diamond Hand strategy and apply it depending on the situation. It is better to come up with a good strategy amid quickly changing trading conditions, namely the tightening of monetary policy and rising energy prices. Some analysts warn that this winter, many sectors may face certain pressure. Some signs of the coming storm can be seen in China.
The researchers assume their work can be used to develop predictive models, which may help identify individuals at risk of panic selling.
Yet, it would be wise to rely on objective data and various types of information. As for psychology, panic occurs when there is a lack of external information. Knowledge of the laws of the market will help calm down at a critical moment and keep assets in the portfolio.
Notably, when the panic has started, it is usually too late to sell. Therefore, if traders miss this moment, it is better to look through your traders and wait for the moment when the panic subsides. At least if you manage your portfolio correctly, some of the assets will always keep the balance. Some of the new ones can be purchased at the peak of the sell-off.
The research shows that the market is not a place for easily panicking people. The ability to control oneself and think soberly in the most stressful situation is the most important skill that determines market leaders.
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