Behavioural Biases in Investing
Attraction to Rising Prices
03 February 2016
Don’t we all love a good discount? I know many people who would go to great lengths to bargain, drive to, and hunt for something on sale just to get that extra dollar off. Sometimes, the effort costs much more than the savings, but there is a sense of satisfaction gained from getting that extra discount.
The picture below shows what typically happens whenever there is a good sale. Don’t you feel like joining in? A drop in car premiums, Black Friday 50% sales, CNY sales, you name it. You just feel like grabbing everything within reach before someone else takes it away from you.
Yet, strangely, when there is a huge discount in the ownership in companies (shares), people run away! Why is this so? Applying the same logic, people should be queuing up in droves just to get their hands on some of these bargains! But everyone stays away, thinking that prices would just get lower.
In the same vein, humans are drawn and attracted to rising prices. Whenever stocks go up, they keep coming back to buy more and more, thinking they would go up even further! That’s why you have all manner of predictions, such as “Dow 30,000”, based on the assumption that prices would never fall.
If prices are high, logically, we should cut back. That’s why a good advisor would tell you to trim, rebalance and generally reduce some risk when things get a bit heated. After all, whenever things get expensive in the grocery store or supermarket, don’t we all tighten our belts a bit?
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