The Influence of Greed and Fear on the Stock Market
As the expression goes, there are two emotions that drive the behavior of stock market investors: fear and greed. Observers of the stock market will note that when prices plummet they do so sharply and quickly. This happens when stock market investors are driven by fear. The same can be said when stocks rise, only in this case investors are driven by greed. You may also notice that stock prices tend to fall more quickly than they rise. This happens because fear is a stronger emotion than greed, but surrendering to either of these emotions can negatively impact individual portfolios and the stock market as a whole.
The Influence of Greed on the Stock Market
The dotcom boom of the late 1990s is a perfect example of investors getting caught up in greed. While greed is typically defined as the desire to obtain more than the individual’s needs would dictate, many would argue that greed stems from the fear of the investor that they won’t get enough to achieve satisfaction. This kind of a get rich quick mentality among stock investors can lead to an “irrational exuberance”; a climate in which stocks can be skyrocketed to price levels they cannot possibly maintain.
The Influence of Fear on the Stock Market
The fear element comes from stock investors who choose to sell because they are afraid of losing gains or from stock investors who are afraid to lose any money at all. When stock prices endure large and persistent losses, investors can become more fearful of suffering further losses, leading to an accelerated downward spiral of prices. On the other hand, fear can also trigger greed as the fear of missing out on gains can be a powerful driving force for stock investors. While greed dominated the stock market during the dotcom boom, there was an overwhelming sense of fear after the bubble burst. Burned investors were looking for low-risk types of investments and money continued to pour out of the stock market.
This overwhelming and unreasonable sense of fear is what value and contrarian investors count on as they search for stock investment opportunities.
Eliminating greed and fear in stock investing
_______________________________________________________________
The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.
« Short-Term Stock Investing Strategies | Home | The Relationship Between Bond Prices and Interest Rates »
Leave a Comment
You must be logged in to post a comment.