Monthly Archives: January 2017

Thursday Trivia : Republic Day Special ~ Investors are you self-handicapping yourself ?

On behalf of Team of Circle Wealth Advisors, we wish you a very Happy Republic Day. Today, the whole country celebrates it’s 68th year of Republic Day to commemorate the coming of our constitution in force.

Self handicapping is a mental strategy by which people avoid effort in the hopes of keeping potential failure from hurting self-esteem. For instance, students frequently participate in self-handicapping behaviour to avoid feeling bad about themselves if they do not perform well in class. Self handicapping is a perfectly opposite behaviour to over-confidence. In general, there are two methods by which people self handicap as discussed below :

The first method people use to self handicap is when they make a particular task harder for themselves in fear of not successfully completing that task. So that even if they fail, they can simply place the blame on some external circumstances or obstacles rather than placing the blame on themselves. ~ Behavioural Handicapping.

While, the second method that people self handicap is by coming up with justifications for their potential failures, so that even if they do not succeed, they can point to their excuses as the reasons for their failures. ~ Claimed Self Handicapping. For example, if a person states that he feels intense pressure before his presentation, trying to justify his lack of preparation for the same.

Often, even investors go through the same. The behaviour doesn’t change even if they are investing directly into the securities market or through an advisor. However, over-confidence is seen in first time or amateur investors who tend to think that they are smarter or more capable than most other investors. Due to which they tend to trade rapidly. Trading rapidly costs plenty, and rarely rewards the effort. After being in the securities market for some time, these amateur investors turn to self handicapping as they learn about their over-confidence. Rarely do they realise that self handicapping is a lot more dangerous. Before investing their money, these amateur investors try to first find excuses in terms of market behaviour so that their self image will be protected even if things don’t happen as planned.

Following are the reasons that investors usually justify their poor performance

      External Factors

  1. Adverse Election Results
  2. Selling or Buying pressure from Foreign Institutional Investors or Domestic Institutional Investors
  3. Government Regulations
  4. Inter-Country War
  5. Surges or Declines in Commodity Prices

    Internal Factors

    1. Because a colleague / relative / broker suggested it
    2. Past performance of a security
    3. Gut / Intuition based decision

     

    These are a few general reasons where an investor, rather than taking responsibility tends to blame the circumstances around him. Such reasons tend to only provide a temporary relief for under performing. Since, the mainstream focus of investing is advertised around fear and greed, most investors tend to skip their behaviours. Even in cases when people invest their money, through an advisor, such are the reasons they are exposed to. In the age of quick communication, it is easy to put the blame on something else rather than accepting the responsibility. Therefore it is always advisable for an investor to do a thorough check on their advisor, where the advisor doesn’t suffer from self handicapping.

    Ideally, an investor or their advisor must be willing to accept complete responsibility of investment results. Since, investment activity is a game which a person has to play over a long period of time, it will be more beneficial if they don’t resort to self handicapping.