Emotions and investor psychology can play a powerful role in driving share market returns and the sharp rebound in 2009 could see a return to ‘greed’, after two years of ‘fear’. In this paper, Robert Van Munster, head of Tyndall Equities, looks at two types of behaviour: ‘anchoring and adjustment’; and ‘aversion to ambiguity’. Both of these heuristics (or ‘rules of thumb’ often gained from trial and error) have a strong influence on investor behaviour and the choices they make and investors need to be aware of these in upturns as well as downturns, as they can lead to conservatism, disappointment and insufficient diversification. Van Munster writes that identifying and understanding these behaviours can not only assist with making more informed and rational decisions, but can also provide an edge over other investors. Many of these behaviours are, however, entrenched. Seeking independent financial advice and investing with a professional fund manager are steps investors can take to reduce the role these behaviours play in their decision-making process.
