There have been countless studies and books dedicated to the way our emotional state influences all other aspects of our life, from our productivity, all the way to our decision-making abilities. People are by definition emotional beings and, because of that, the advice to just let go of emotions and be objective is often nothing more than a platitude.
It is obvious that both positive and negative emotions are a vital part of our day-to-day activities. As a result, we should learn to control them, but we should never completely ignore or eliminate emotions from our professional life.
Investors are faced with the tough job of making important decisions on a daily basis, so their emotions come into play, even if they admit it or not. The involvement of emotions in our decision-making process is undeniable, but is this factor a helpful or damaging one?
As the answers are never 100% on one side, we will cover both positive and negative emotions that can affect investment results so you can recognize and separate the good, the bad, and the ugly.
What Makes People Invest?
Everybody wants to know what triggers people to invest their savings in a certain market, be it stocks, goods or any other assets. Non-professional investors usually put their money at stake with the hopes of a substantial gain, usually based on their own intuition and without any real training.
The main motivation for non-professionals is their hope that they will manage to double or even triple their investment while maintaining the lowest possible risk. In this case, they base their investment on a combination of luck, intuition and a dose of risk that may or may not pay off.
Professional investors, on the other hand, benefit from specific training and they pride themselves on making rational investments. Investors would be the first to tell you that there’s no emotion involved in their decisions, but this is not necessarily true. Sometimes and especially in volatile, unstable markets, a dose of imagination and intuition will come in handy, so your emotions are not to be discarded from the start.
Both professional and non-professional investors share a common motivating factor. They all wish to exponentially increase their gain while maintaining a low-risk level. Of course, this is a difficult task in the present financial and economic market, where major events can happen overnight. Fear of loss, the hope of gain and self-confidence are all constant elements in the life of an investor, and these emotions are a double-edged knife. They can help, but they can also damage your rational decision-making process.
Do Your Emotions Matter?
The simple answer is “Yes”, but the investment world is never simple or straightforward. We have already established that emotions are part of the adventure of becoming a successful investor, and no one can honestly say they can be ruthless, rational, un-involved investors.
The fact that all people feel emotions sounds like an obvious statement, but it is worth repeating in a world that edged towards cold-bloodedness. Investors should not pride themselves on becoming completely immune to human emotions, but they should invest their time and energy in structuring the emotions they feel.
We have already mentioned that fear, hope, confidence and many other feelings have a substantial impact on the way we make decisions. They can lead us to caution, recklessness, steadiness or even creativity in our investment plans and they greatly influence results.
The first step is to identify, isolate and separate the positive emotions from the damaging ones. Only after this mental exercise, we can gain the ability to focus on the emotions that have the potential to enrich our decision-making process. A great, professional, well-researched investment plan is a must for any professional investor, as it will reduce risks and identify potential gains, but any successful investor knows that emotional intelligence is also another part of the equation.
Damaging Emotions for Investment
As it was already established, emotional behavior is a key component of our life, and it influences our professional activity as well. There is no denying that emotions are inherent in our daily existence, but the impact they have on our activities is something any investor should be able to control.
In an unsteady finance world, where stakes are high and risks are daunting, a blind sense of optimism is of no use. Equally useless, a paralyzing fear that prevents investors from making decisions can irreversibly affect the results and gains of businesses.
The damaging emotions that can and will affect your results have their root in an insufficient mental and emotional training. Investors spend years on acquiring knowledge and experience, but they rarely think about the time they should invest in their emotional skills. Specialists have been talking about the most damaging emotions to investments for years, and it is high time investors pay attention.
Fear of loss
Probably the most important emotion connected to the psychological theory of investment is the fear of loss. Fear of losing the hard-earned capital of your business, client, or even your own life savings is the first emotion any investor experiences. It is absolutely normal to try to control and eliminate risks, but you should never allow fear to stop you from taking action. The fear of loss can become paralyzing and lead people to stalling and finally missing out on opportunities that will never return. Fear can be assessed, controlled and eliminated as long as the investor is aware of it and takes the time to investigate its source.
Unfounded optimism
Usually present with non-professional or beginner investors, unfounded optimism can lead to irrational decisions. The belief that things will eventually turn out all right can be an asset when it is backed up by strong evidence. However, if unfounded optimism is the leading emotion for an investor’s decision-making process, chances are they are not going to be very successful. There are a lot of sources dedicated to avoiding emotional investments, which can become dangerous and even damaging.
Uncertainty
Any investor will tell you that uncertainty is a key part of their professional life, as markets are unstable, and shifts can happen overnight. Uncertainty is embedded in the very idea of financial investment, but on an emotional level, it can damage the quality of the decision. You should never second guess a decision you have made, as uncertainty towards your own abilities will lead to an array of highly damaging emotions such as insecurity and low self-esteem.
Insecurity
Investors are always subject to insecurity due to the very nature of their field of activity. Emotional insecurity is caused by the uncertain aspect of a specific market, and while it is a natural feeling, it can easily become destructive. In times when markets seem to plummet without warning, the degree of insecurity rises and investors become overly cautious. Too much caution most of the time leads to missing out on major opportunities that never wait for too long.
Low Self-Esteem
Self-esteem is a key emotion in both our professional and personal life. The image you have of yourself deeply affects any activity you perform, and the overall quality of life. A low level of self-esteem is one of the main enemies for investors as they base their decisions on a combination of knowledge and intuition. If you don’t trust yourself with making the best possible decisions, you don’t have many chances of becoming a successful investor. Therefore, low self-esteem is an issue that must be addressed at once.
Taking into account the fact that all human beings are subject to emotional behavior, it is crucial for investors to analyze their own emotions and understand their impact. You can claim that you are able to make informed, rational decisions without any emotional investment, but this is not true. Investors are subjected to emotions, sometimes even more than regular people, as they earn their living in a high-risk profession.
It should become a priority for investors to be able to identify and eliminate those emotions that can lead to either lack of action or irrational decision making. By controlling and analyzing your emotions, you will manage to identify the opportunities worth pursuing and have the courage to invest in them.
Conclusion
There are plenty of studies and research papers dedicated to behavior patterns and emotional intelligence, and all investors should look into them. Your emotional intelligence is as vital to your career as your experience and practical skills, and you should definitely take the time of learning more about using your feelings to benefit your activity.
As you have seen, emotions are not only impossible to eliminate, but also necessary, and even beneficial at times. The key for a successful life in investment is to be able to know which is which, and then have the courage to pursue the positive ones, in spite of the fear you might experience.
Emotional investment is a reality that will gain even more steam as the markets become less and less predictable. Efficiently managing your emotions and making them work for you, instead of against you, will eventually prove to be an asset that will lead you to a successful career in the field of investment.
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