Investing and the Fear of Regret and Greed

People tend to feel sorrow and grief after having made an error in judgement.

Investors deciding whether to sell or buy a security are typically emotionally affected by whether the security was bought or sold for more or less than the current price.

One theory is that investors avoid selling stocks that are going down, in order to avoid the fear, pain and regret of having made a bad investment. On the other hand, they also avoid selling when prices are going up, because they are very greedy and are afraid that the price will keep on going up.

Many people are wondering why they didn't take their i.e. 100% or 200% gains when they had the chance. Most investors will rationalize they ran these high gains down because they were afraid they would lose even higher profits. In my opinion, for many of these investors, it was just plain greed that prevented them from selling their stocks.

Every experienced trader knows that fear and greed are two emotions that can dramatically affect your success in the market.

You have to deal with controlling greed and fear every single day. Although there are no easy answers when it comes to the stock market, of one thing I am certain:

If you are a greedy trader and always try to squeeze every last point out of every trade, it's only a matter of time before you end up with a lot less than you actually started with!.

Oliver Velez of www.Pristine.com says that greed is "that little monster that resides in every single individual." Part of our success in the market, he says, is learning when to give this little monster a little bit more room to operate and when to curtail its actions. "Every single event has two ultimate outcomes--either a win or a loss," says Velez. "Greed can make you gaze at the stars without having any consideration of the rocks below. It can prevent you from considering the fact that there is a downside and establishing a stop loss, or developing a systematic way of exiting or aborting a trade if in fact things don't work out."

The embarrassment of having to report the loss to others may also contribute to the tendency not to sell losing or gaining investments.

Some researchers theorize that investors follow the crowd and conventional wisdom to avoid the possibility of feeling regret in the event that their decisions prove to be incorrect.

Many investors find it easier to buy a popular stock and rationalize it going down since everyone else owned it and thought so highly of it.

Copyright © 2005 I.E.C. Haramisharamis@greekshares.comhttp://www.greekshares.com

Ioannis - Evangelos (Akis) C. Haramis was born in Greece in 1951 and he studied in Greece, USA and in Belgium. He has been active in the stock markets since 1972. Since 2002 he is New Business Development Managing Director at an Investment Bank and the publisher of GreekShares.com