Why can't the bull market make a lot of money, and the bear market loses money to the end?
Let's describe a phenomenon first. If you are trading in stocks, please contact your own experience to see if the description is correct?
There are bull markets and bear markets in the stock market. In a bull market, asset prices generally rise, and you are usually in a profitable position. However, you may not be able to make a lot of money in a bull market. After 2 or 3 daily limits, you will be safe, right?
During a bear market, asset prices generally fall, and you are likely to lose money. However, in a bear market, you may lose money to the end, and you are reluctant to cut the meat for a long time. The loss-making stocks in your hands have been accompanied by the long bear market. You have been waiting for the day when you will make money. When the price returns to the purchase price, you are finally out of the trap , After throwing it out quickly, the price will soar again, making you regret it.
Is the description accurate?
Why is your behavior predictable?
This is because people are risk-averse when making a profit, so we are unwilling to take risks and choose to "pocket for peace"; but when losing money, people don't like to accept deterministic losses, so we always want to take a chance. Put, so we have been waiting.
Why is this so? This is not an isolated phenomenon. The theory of behavioral finance predicts this.
How does risk preference affect human decision-making?
Let's use an example to experience the different psychology of people in the face of profit and loss.
Please choose one of A and B:
· A: You have a 50% chance of getting 1000 yuan and a 50% chance of getting no money.
· B: You have a 100% chance of getting 500 yuan.
Would you choose to bet on A, or B, which is sure to make a profit? Remember your choice.
Then please choose one of C and D:
· C: You have a 50% chance of losing 1,000 yuan, and a 50% chance of not losing.
D: You lose 100% of 500 yuan.
Would you choose to bet C, or D with a certain loss?
Did you choose B between A and B, with a 100% chance of getting 500 yuan; and between C and D, you chose to bet C, with a 50% chance of losing 1,000 yuan and a 50% chance of not losing money?
Most people will choose this way.
So between A and B, what do you like about B?
You might say, B is more certain, I like certain things, I don't like taking risks.
Like certainty, don't like risk, expressed in financial terms, is risk aversion. It is no surprise that rational people are risk-averse.
However, I don’t know if you have discovered that you don’t like to take risks. This risk-hating preference is only in the face of profits. When you face losses, you did not choose deterministic losses, but chose to take a gamble. .
So, in the loss zone, people are adventurous.
Therefore, if you want to persuade a gambler to stop gambling, it is really difficult, because telling him not to gamble is to let him accept a certain loss. He will say: Please give me another chance, I may make money.
In fact, not only gamblers, you also want to take risks when you lose money, right?
Traditional finance believes that people hate risks. Behavioral finance believes that people hate risks only when they face profits, but when they face losses, people show that they like risks and prefer to gamble to see if there is an opportunity to turn a corner. born.
What will be the result of this kind of psychology?
At its simplest, this leads to different behavioral decisions during bull and bear markets. This goes back to what I just described at the beginning. In a bull market, you always choose to settle for nothing, and you won’t make much money; .
How does "loss aversion" affect us in a bear market?
Now we have understood that people's risk appetite is different when they are profitable and losing money. Decision-making theory also tells us that investors are also asymmetrical in their mentality when faced with profits and losses.
When people make decisions, the balance of interests and interests is unbalanced in their hearts, and the weight given to the "harm avoidance" factor is much greater than the weight of "benefit seeking", which is called loss aversion or loss aversion.
Let's do a test first to understand what loss aversion is.
Assuming there is a gamble now, there is a half probability that you can earn 100 yuan, and there is a half probability that you will lose 100 yuan. Would you be interested in participating?
This bet is called a "fair bet". Most people don't want to participate in a fair game, and don't find it interesting. So how can it make you feel interesting?
If the probability is 50% to 50%, if you lose, you will lose 100 yuan, but if you win, you can earn 200 yuan. At this time, would you like to participate?
You should.
In this case, we call the loss aversion coefficient 2. If the emotion has a strength value, the pain value of the loss is about twice the value of the joyful feeling brought by the same profit.
How does this play out in financial markets?
If A buys a stock, the price limit goes up, and he makes a profit of 10%, he will be very happy, but if it goes down the limit and loses -10%, the pain may be twice as much as the joy of profit.
On the one hand, the psychology of loss aversion will make investors try to avoid making decisions that will cause them losses.
For example, entrust others to invest, invest in funds or give it to someone you trust. In this way, when losses occur, you can shift the responsibility to others, and reduce your own guilt for failing investment decisions and being responsible for it. It is also possible to invest together as a group, so that when you see everyone losing money together, you will feel less uncomfortable.
Of course, it’s not that it’s wrong to invest in funds or agree with other people’s decisions, but it’s irrational if this is a consideration factor in decision-making. Rational investment behavior only looks at the investment object and will not refer to other people’s decisions, or Blame the fault on someone else.
On the other hand, the psychology of loss aversion will make it difficult for investors to stop losses when losses occur.
Stop loss is to let the floating loss be realized, which makes investors very painful. Many people will choose to ignore it when they lose money, and turn a blind eye to it, and finally become numb. This is the psychology. Therefore, investors also call stop loss "cutting flesh", describing it as painful as cutting flesh. But the fact is that if the stop loss is not decisive, it will increase the loss.
Institutional investors are much more rational than individual investors, and they stop losses decisively. But institutional investors are also human beings, and they are also loss-averse. The difference is that in order to overcome the shortcoming of human nature that they can’t cut their own flesh, institutions generally set up a risk control department, which will be taken over by the supervision and audit department when it is necessary to stop losses. And issue trading orders, after all, cutting other people's flesh is easier to operate than cutting one's own flesh.
Therefore, in a bear market, loss aversion makes us not want to turn losses into a fait accompli, and risk preference makes us want to take a chance. In this way, in a bear market, we will lose more and more, and continue to lose more and more. In the end it was a mess.
How is "loss aversion" different in a bull market?
Now that we understand loss aversion, the loss aversion effect affects us differently in a bull market.
We just said that in a bull market, people are risk-averse and willing to settle for peace of mind, but there is one exception. That is the "casino money effect".
What does that mean?
The "casino effect" refers to the underestimation of risk when making money is easy.
In order to attract customers, casinos sometimes give newcomers some chips. Will you immediately exchange your chips for real money and walk away, or will you continue to gamble with the money?
For another example, if you suddenly win a lottery while playing a slot machine, and the machine spits out a lot of chips, will you exchange the chips for real money and leave, or will you continue playing?
Would you choose to keep betting instead of leaving? Until all the "casino money" is squandered.
This is called the "casino money effect". And if the money is our own hard-earned money, we generally won't take such a big risk. For this easy money, our loss aversion is greatly reduced.
Loss aversion makes investors dare not enter the market no matter how low it falls in a bear market. So bear markets tend to be oversold.
However, in a bull market, many investors have earned a lot of "casino money", so they will not leave the market easily at this time, but shout optimistically: "XX is just around the corner!" This is how the market bubble is formed.
How to deal with bulls and bears?
Now that we understand the difference in risk appetite for profits and losses, and how "loss aversion" behaves differently in bear and bull markets, what should we do?
In a bear market, sell as soon as possible to avoid losses; in a bull market, keep stocks in your pockets to make more profits?
wrong!
To overcome the psychological influence above, our focus should not be on profit and loss. The most important thing we have to do is to overcome the influence of reference points.
Forgetting that buying price, there is no concept of profit and loss.
Always looking at profits and losses, it can be called "looking back", which means that when we invest, we are always comparing with the past.
The correct investment should "look forward", look at the future, and make decisions based on expectations. If it is expected to rise, buy or hold; if it is expected to fall, it should stop loss immediately.
This method can be used not only in financial investment, but also in all major decisions in our lives.
Decision errors due to probability of misjudgment
Is there anyone around you who is particularly afraid of flying? In terms of the probability of accidents, airplanes should be regarded as the safest means of transportation. Why would anyone be afraid to take them?
Also, do you know anyone who loves to buy lottery tickets? The probability of winning the lottery is very low. This kind of investment is not cost-effective, so why are there so many people buying it?
Next, among your friends who invest in stocks, is there anyone who is keen on new stocks? The probability of winning the lottery for new shares is also very low, and this investment method may not be cost-effective.
So how do these decisions still happen? In fact, these are all decision biases caused by the probability of misjudgment.
In other words, when a person makes a decision, the weight given to an event in his heart is not equal to its actual probability.
This is completely different from what a rational person would do.
As an example, let's take a look at how rational people do it.
If there is an investment project, 50% may earn 200,000 yuan, and 50% may lose 100,000 yuan. Can this project be invested?
There are two factors in making this decision, absolute profit and loss (200,000 and negative 100,000) and probability.
For a rational person, what is the probability is the weight of decision-making. The weight of the probability to the decision is a 1:1 linear conversion. A rational person will make a weighted average when making a decision: 20*50%+(-10*50%), once calculated, if it is positive, then vote.
However, the decision-making theory of behavioral finance has a conclusion on the weight problem, that is, the transformation from probability weight to decision-making weight is nonlinear, that is to say, when making a decision, we are irrational, and the weight given by ourselves is not equal to its actual value. probability.
Low probability events are overestimated
For example, take the flight we mentioned above. The probability of an accident is very low when flying, but the consequences of an accident are very serious. Whether you can fly depends on the product of the consequences and the probability of an accident.
If in your mind, the absolute loss is already huge, and you magnify the probability of an accident when making a decision, you will not be able to take the plane. This is why many people are afraid of flying. This kind of person is particularly sensitive to small probability events, and the decision weight deviates greatly from the real probability. The same is true for buying lottery tickets.
In fact, not only those special groups who are afraid of flying and those who love to buy lottery tickets, but also the mistakes of investors in the financial market who overestimate low-probability events are very common.
Such events have a common feature: they have high absolute profit and loss, but the probability is very low. Investors are often attracted by the absolute return and magnify the probability in their minds.
For example, playing new shares. The so-called new shares are to buy new shares at a discounted price, such as a 50% discount. This rate of return is relatively high, and it is basically risk-free. Therefore, many people are willing to buy new shares. However, because there are too many people playing, it is necessary to draw numbers to determine who can win the lottery, but the winning rate is very low, for example, only 0.1%.
Calculated by multiplying the rate of return by the winning rate, the average rate of return is only 0.05%, which is actually very low. But in the minds of investors, the weight of low discounts in decision-making is magnified, so new shares are very attractive.
The problem for investors is that they only value the returns, but ignore the low probability.
This kind of feature with high return but low probability is called "high skewness" in academic language. There are many such highly skewed investment varieties in the market.
For example, stocks in hot topics often have such high skewness characteristics, and high returns attract a large number of investors. However, many of these stocks are not supported by fundamentals, and the probability of making profits is very low. Time is very limited, only a very small number of people who enter the market early can make a profit, and those who enter the market later are "carrying the sedan chair" for their predecessors, causing many followers to lose money.
Many people understand the concept of return and risk in financial investment, but few people understand the concept of "skewness". In investment, not only returns and risks must be considered, but also skewness. Skewness does exactly what probability weights do.
Low probability events are directly reduced to 0
For example, when your child goes out, you may say, "Be careful when you go out!" and the child may think you are nagging, and reply "Got it, it's okay!" You think going out is risky, so Remind him to be careful, but he directly reduces the weight of low-probability events such as danger to 0, so he will think you are very wordy.
The above two situations are actually low probability, but when making a decision, one is overestimated and the other is simply ignored. In the investment market, how should we distinguish and judge?
The first type is that investment objects with overestimated probability tend to have high skewness, which is characterized by very high profit and loss. Investors will be attracted by extreme profit and loss, and the probability of neglecting it is actually very low. This is the case with flying, high-yield investing, and more.
The second case emphasizes disregard for low-probability events.
For example, investment experts or people who think they are experts are less willing to believe tiny information that contradicts previous beliefs and choose to ignore it.
In financial markets, individual investors are more prone to the former situation of overestimating low-probability events.
High probability events are underestimated
Everyone should know a very popular TV series called "In the Name of the People". In the play, Secretary Gao Yuliang fell in love with a girl named Xiaofeng, and even left the family for her. Ask him why he likes Xiaofeng so much? Gao Yuliang said, this girl Xiaofeng is really amazing, she also knows some Ming history! But he forgot that his wife, Mr. Wu, is the master of Ming history.
Teacher Wu's love for Gao Yuliang is a high-probability event. In Gao Yuliang's mind, the decision-making weight of the high-probability event is reduced, and he can't feel it. However, Xiaofeng, who has only met a few times, is a low-probability event, and the decision-making weight in his mind becomes larger, and finally leads to wrong decision-making.
Have you ever had the feeling that "you feel the most beautiful when you lose it"? For example, the concern of your parents, why do you not feel beautiful when you have it, but only when you lose it? This is caused by people underestimating high probability events.
In investment decision-making, this underestimation of high-probability events is typically manifested as a lack of emphasis on capital allocation.
The so-called capital allocation refers to how funds are allocated in large categories of assets, how much to deposit in banks, how much to buy stocks, how much to buy bonds, etc. This ratio is very important, accounting for more than 90% of our investment income! But most people ignore this high probability factor and spend a lot of time on how to choose individual stocks, which is an important reason for low investment returns.
Therefore, in financial investment, the most important thing is to seize high-probability events and give full play to its value. Unfortunately, most people do it the other way around.
High probability events are raised to 1
This situation often occurs in continuous probability decision making.
For example, as a leader, now you have to decide whether to invest in a project. This project consists of 7 links, and each link has a 90% certainty that it can be won.
You may think that this project is very safe and you can vote. In fact, when 90% is multiplied by 6 times, the probability is less than 50%, which means the project is more likely to fail.
So what's wrong? The mistake was to overestimate the probability of high-probability events and directly increase it to 1. 1 multiplied by 6 times is still 1, so a wrong decision was made.
Similarly, the latter two are actually high-probability events, so why is one underestimated and the other overestimated? How to distinguish between these two cases?
Raising the probability directly to 1 often occurs in continuous decision-making events.
For example, for analysts in the financial market, recommendation decisions often include several consecutive steps, such as research, analysis, judgment, and decision-making. If you receive a signal with a high probability of affirmation at each step, you will tend to make deterministic inferences, while Ignoring the length of the decision chain;
In the case of a single decision, it is easy to underestimate the high probability, that is, the "lost is the most beautiful" effect.
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