Memories of My Psychology

Today, I have thought about the behavioral traps that I have fallen during the last few years, which include a stock market boom and a stock market burst.

Trap #1: Anchoring

When the market was trending downwards, I thought that the market was quite undervalued, compared to the valuations seen in the earlier stock market boom. It turns out that for some stocks, what was cheap turned to be cheaper. And for other stocks, what was cheap turned to be very expensive, as their earnings also trend downwards. I have fallen into the trap of anchoring to the valuation seen during the stock market boom.

Trap #2: Over-confidence

Similarly, while I felt uncertain about the market in late 2007, I was confident that I would not suffer large losses if the stock market tanked. Needless to say, I was proven wrong. I have fallen into the trap of over-confidence. I find myself still susceptible to over-confidence every now and then.

Trap #3: Over-enthusiastic

Every now and then, I would find myself over-enthusiastic over some new stocks that I found to be undervalued. And, I will always place an buy order for the new stock. However, after a few days, when my mind becomes calmer and start to worry about the new stock, I would invariably find unexpected faults with the new stock. I have fallen into the trap of being too enthusiastic on new stocks and letting the over-enthusiasm taking control over my normal cautiousness.

Trap #4: Once bitten, twice shy.

Once one is bitten, it is always good that one learns from the bite. However, we may over-learn and develop an unnecessary phobia. I have been bitten by China textile stocks and hence I am staying miles away from them even though these China textile stocks seem cheap. Rationally, I should try to see if I should buy some. However, I have fallen into the trap and developed a phobia for China Textile stocks. It may take me a long time to recover from this phobia.