Oliver's Insights - Booms, busts and investor psychology
15 April 2011 - This note looks at the role played by investor psychology in investment markets and what it means for investors.
The key points are as follows:
- Investment markets are driven by more than just fundamentals. Investor psychology plays a huge role and helps explain why asset prices go through periodic booms and busts.
- The key point for investors to be aware of is the role of investor psychology and the influence of psychological illusions on investment decision making. The best defence is to be aware of past market cycles (so nothing comes as a surprise) and to avoid being sucked into booms and spat out during busts. If an investor is looking to trade they should do so on a contrarian basis. This means accumulating when the crowd is panicking, lightening off when it is euphoric.
