Investing in a good mood? Be extra careful.

Studies show moods can cloud your judgments.

Being in a good mood is generally a good thing. After all, in a tumultuous economic backdrop, one would require a will of the holies to not get triggered by the things we encounter daily — let’s start with how deli sandwiches are getting more expensive, like, dude… chill with the hikes. In this article, we will look into trading psychology that could eat up your portfolio — mood-driven biases.

However, as much as a good mood is a good thing, it can be the reason why ‘the wheel of the bus goes round and round’ that you’d reach the not-so-good mood phase in your daily life.

A full belly leads to happier prisoners.

“Uhh… isn’t this article about investment?”

Yes, but it’s good to see how severe the case of mood-driven judgments can be. We will now have a look at the example of those whose bread and butter rests on making judgments — judges! In a 2011 study, three researchers studied 1,112 judicial rulings on parole requests by prisoners and found a worrying pattern.

Said pattern is that apart from legal principles, evidence, and facts — there was one predominant factor that would affect the judgments made by eight Jewish-Israeli judges involved in the study — have they had any breaks before making the judgments?

“Aren’t they professionally trained not to fall to biases?”

Yes, they are, but humans are humans. From their studies, the researchers found that there is a striking pattern where the proportion of favorable decisions made to the prisoners is often higher at the beginning of the day and it would eventually decline. This would go on until break time when the favorable rates would then be ‘recharged’.

Better mood begets intuitive behavior.

In another study, a group of researchers found out that people who are in a bad mood tend to be more judgmental, sceptic, and rely less on their intuition when making a decision. Apart from the others, being less intuitive is somewhat a good thing when it comes to making decisions like what stock to buy.

Being intuitive means that you tend to follow the first thought that comes to mind. Disney cartoons might tell you that you should follow your heart, I did that and found myself having to finish a box of extra-large pizza alone. When making a small economic decision as to what to have for dinner can be jeopardized by following your heart, what more or where would you put your savings?

Being intuitive would cloud your judgment from any facts that could have helped you make better decisions. Even financial data that doesn’t stand well with your intuition tends to be disregarded to make way for your intuition. I suppose we don’t need to remind you how investment decisions should always be made based on facts and data rather than gut feelings.

What can you do?

As much as we want to avoid being emotional when investing, we are human beings after all. Even judges who are trained to not fall to biases can somewhat be affected by their snack times. With finance, however, it is much easier to tell two and two apart, since we are dealing with numbers.

Stick to the numbers

Sometimes your ‘gut feelings’ may have an unbridled conviction for a certain buy or sell, even when the numbers are pointing in a different direction. Of course, there would be times when you’d think “damn, should’ve gone with my gut feelings. That stock went up by 100%!” but that is simply luck, and you can only push your luck so far before the cookie crumbles.

Stick to the numbers and analysis, If the fundamentals say it’s not a good long buy, then don’t buy. If the technicals point to a fall, then don’t buy, regardless of what you ‘feel’ or what the media makes you feel about the stock.

Stick to your plans

Sometimes things don’t work as you planned it to be. Many times, it can be due to you yourself not sticking to your plan. Here’s the thing when it comes to finance, stick with your plan. If your plan is long-term growth, then ignore the short-term price fluctuations. Even better, you don’t have to check your portfolio every day when you’re going long. It will only add unnecessary nervousness.

If the price falls into a spot that you have decided is a no-go, then sell. There’s no use in clinging to the hope that maybe the market isn’t just showing its soft side yet. There’s no soft side in the market. It’s all numbers and a bunch of people either panicking or being greedy.

When you abandon your plans and leave it to the “what if” (what if it will all work out, what if this is my chance, what if they are failing, what if that…) you’re simply relying on luck. Wall Street is hard on the unlucky ones, but they’re much colder and harder on those who simply rely on luck.

Invest in funds

Another way of doing it is that you can invest in funds. Of course, there are three major things that you’ll have to keep in mind when doing so:

There are management fees.
You will still have to spend some time looking for good funds.
Funds are usually managed by humans too, but they are better trained to not be as emotional as we normal investors/traders are.

Consult financial advisors

Consulting with a financial advisor is a valuable step in managing your investments and emotions effectively. A financial advisor can assess your financial situation, risk tolerance, and investment goals to create a customized investment strategy that aligns with your needs and objectives. They can provide an objective viewpoint, free from emotional biases (at least better than normal investors/traders).

Of course, this option would usually be for those who can actually afford to consult financial advisors.

Bottom line

While experiencing a positive mood is generally a favorable state of being, it can also have unintended consequences, particularly in the realm of investment decision-making. mood-driven biases can obscure sound judgment and impact choices. We underscored the significance of adhering to a rational, data-centric approach when engaging in investments, rather than yielding to emotional impulses. Whether it involves adhering to a meticulously devised investment plan, maintaining discipline amid market fluctuations, or seeking counsel from a financial advisor, the primary message remains unchanged: emotions have no place in prudent investment strategies, and logical decision-making based on empirical evidence & analysis should invariably take precedence.

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None of the material above or on our website is to be construed as a solicitation, recommendation or offer to buy or sell any security, financial product or instrument. Investors should carefully consider if the security and/or product is suitable for them in view of their entire investment portfolio. All investing involves risks, including the possible loss of money invested, and past performance does not guarantee future performance.