Brief introduction to the topic: Why psychology is important in the context of investing Investing is often perceived as a purely economic or financial activity that requires us to do mathematics, market knowledge and strategic planning. However, in practice Many investment decisions are also heavily influenced by our psychology - our fears, expectations, biases and emotional reactions. Even the most experienced investors are not immune to psychological pitfalls that can significantly reduce the effectiveness of their investment strategies. Therefore, understanding how our minds work in context. financial decisions can be a key factor in the path to successful investing. The purpose of this article is to provide an overview of the basic psychological distortions that often prevent us from being rational when making investment decisions. We will look at how these distortions can distort our view of risk, return and markets. possibilities. More importantly, I will show specific techniques and exercises from cognitive behavioral therapy (CBT) that will help you identify and correct these distortions. This way, you can make more informed and rational financial decisions. Psychological biases and their impact on investing Confirmation Bias Confirmation bias, or “confirmation bias,” is one of the most common psychological biases. This effect is that people tend to seek, interpret, and remember information in ways that confirm their existing beliefs or hypotheses. In the context of investing, this can lead to a number of problems such as overconfidence, ignoring warning signs, and underestimating risks. Examples: Selective attention to news: Imagine that you have invested in a certain stock, and are now actively looking for news and articles that talk about the growth of that company . At the same time, you ignore information about possible risks or negative factors. Ignoring conflicting information: Let's say you believe that cryptocurrencies are the future of finance. Therefore, when faced with research or expert opinions that talk about the high volatility and risks of cryptocurrencies, you ignore them or dismiss them as “misunderstanding.” Re-evaluating your own predictions: If your previous investment “worked,” it can strengthen your belief in your intuition or analytical abilities, even if success was the result of chance or a general market trend. In all of these cases, proving oneself is right can lead to ineffective or even dangerous investment decisions. It limits your ability to see the big picture, think through alternatives, and adequately assess risks, which is key to investing. Overconfidence Effect The overconfidence effect is another common psychological bias in which individuals overestimate the accuracy of their predictions or their skills and competencies. In the context of investing, this can manifest as overconfidence in one's ability to predict market movements, value assets, or even “beat” the market. This effect can lead to a number of negative consequences, such as making overly risky decisions, under-diversifying a portfolio, or underestimating potential risks. Examples Frequent market trades: Overconfident investors often make excessive trades, believing that they can "outsmart" the market . This not only increases fees and costs, but often leads to poor overall portfolio returns. Ignoring expert opinions and recommendations: Confidence in one's own knowledge and skills can lead investors to ignore the advice of financial analysts, economists, or even mathematical models, believing that their “intuition” is better. InsufficientDiversification: Overestimating your abilities can slow down or even prevent the process of diversifying your investment portfolio. An investor may believe that he understands a particular asset or sector so well that he does not need to spread the risk. Lack of a Plan B: Overconfidence in the success of a chosen investment strategy can lead to a lack of adequate plans in case of unexpected market changes or losses. Emotional InvestingEmotional investing means making financial decisions based on subjective feelings or intuition, instead of objective analysis and rational thinking. Emotions such as greed, fear or even attachment can greatly distort our view of reality in an investment context. Emotional decisions often lead to unpredictable and risky actions that can negatively impact the overall return of a portfolio. Examples Panic Selling: During periods of market downturn, many investors panic and begin selling their assets, fearing even greater losses. This emotional reaction often leads to missed opportunities as assets may be sold at undervalued values. Greed and Pursuit of Return: In the wake of a booming market, some investors may become "greedy", investing in assets without proper risk analysis, simply because " everyone does it.” Attachment to Certain Assets: Sometimes investors develop an emotional attachment to certain assets or companies, perhaps due to personal memories or subjective beliefs. This attachment can prevent them from selling an asset in a timely manner, even when all indications are that it is worth doing so. Succumbing to “FOMO” (Fear Of Missing Out): The fear of missing out on an opportunity to make money can lead to hasty and thoughtless investment decisions, such as entering into the market at its peak without understanding the risks. Loss Aversion Loss bias is the tendency to feel more stressed about losses than excited about gains. In economic theory, this means that the pain of a loss is typically felt more strongly than the joy of a similar gain. This effect can affect investment decisions, leading to over-caution, delaying the sale of losing assets, and avoiding risks even when they may be worth taking. Examples: Delay in selling losing assets: Investors susceptible to loss aversion often delay selling stocks that have fallen in value. , in the hope that they will regain their value. This can lead to large financial losses if stocks continue to fall. Avoiding Risky Investments: Fear of losses can lead investors to avoid risky assets or strategies, even if they offer high potential returns. As a result, their portfolio may not be optimally diversified. Switching to "safe" assets at the wrong time: During times of market instability or downturn, the effect of loss aversion may lead investors to move funds into "safe" assets such as bonds or even cash, thus thereby missing out on the opportunity to buy other assets at a lower price. Psychological Exhaustion and Stress: Constantly being preoccupied with losses can cause emotional exhaustion and stress, which in turn can lead to even poorer investment decisions. Tips and Exercises Exercise 1: Introspection and JournalingStep 1 : PreparationChoose a journal format: This could be a regular notebook, an electronic document on your computer, or a dedicated notes application on your mobile device. Create a template for your entries: The template should include the date and time, type of investment decision (buy, sell, hold and etc.), the asset or financial instrument, your expectations, your current emotional state and any other factors that you consider important. Step 2:Real-Time Recording Complete a journal immediately after making a decision: Try to take notes as quickly as possible after making an investment decision so that your memory of events and feelings is as accurate as possible. Describe the decision and circumstances: Include all technical and fundamental factors that influenced your decision, and also indicate what emotions you experienced at that moment. Add your expectations: What do you expect from this decision? What are the potential risks and rewards?Step 3: Regular ReviewRevise Entries: Devote time to reviewing your journal at least once a week. Try to determine if there are any recurring patterns or psychological biases that often influence your decisions. Evaluate the results: Compare your productivity and emotional state with periods when you did not journal. Has anything improved? Step 4: Correction and Reflection Identifying Problem Areas: Based on your analysis, highlight those areas that require further work or correction. Creating an Action Plan: Determine specific steps to correct the identified problems and distortions. This may include further education, consulting with experts, or changing your investment strategy. Continue the journaling practice: Even if you notice improvements, continue to journal. It will serve as an excellent tool for your continuous self-improvement. By following these steps, you will create an effective self-monitoring tool that will help you become a more aware and successful investor. Exercise 2: Challenging Beliefs Techniques for Identifying and Challenging Irrational Beliefs This exercise focuses on identifying and analyzing irrational or destructive ones beliefs that may influence your investment strategy. By following the techniques below, you can discover these hidden beliefs and evaluate their rationality.Step 1: Gather InformationAsk Yourself Questions: Ask yourself what beliefs underlie your investment decision. It could be something like “I always do well in investing in the technology sector” or “I can never understand complex financial instruments.” Step 2: Test for Irrationality Test the belief for generalization: Ask yourself whether the belief is based on one or more negative (or positive) experiences, and whether it is a fair generalization. Check for absolutism: Beliefs like “I should always succeed” or “I should never lose money” are absolute and most likely irrational. Check for catastrophizing: This is when you you think that if something goes wrong, it will be an absolute disaster. For example, “If this asset goes down, I will lose all my money.” Step 3: Test Beliefs Collect Evidence: For each belief that you think is irrational, try to find evidence to support and refute it. Scenario Analysis: Imagine the worst-case, best -case, and most-likely scenarios related to this belief. Assess how well your belief corresponds to reality. Step 4: Correcting Beliefs Reframing: After analysis, try to reformulate your belief so that it becomes more rational and adequate. For example, instead of “I should never lose money,” you could say, “I will strive to minimize risks and be prepared for possible losses.” Practice a New Belief: Strive to apply this new belief to your next investment decisions and observe changes in your behavior and results. .Exercise 3: Dealing with EmotionsUsing Emotion Regulation Techniques for Better Decision MakingEmotions often play a large role in investment decisions, leading to impulsiveness, thoughtlessness and mistakes. It is important to learn how to manage these emotions for more rational and thoughtful decision making. Step 1: Identifying Emotions Determine your emotional “temperature”: Before making any decision, assess your currentemotional condition. Do you feel excitement, fear, uncertainty? Step 2: Regulation Techniques Breathing: Use deep breathing techniques to reduce stress and excitement levels. The 4-7-8 method works for this: inhale for 4 seconds, hold your breath for 7 seconds and exhale for 8 seconds. Time-out: If you feel that you are very emotionally affected, give yourself a “time-out” - delay making a decision to return to it with a clearer and calmer mind. Visualization: Imagine different outcomes of your decision and analyze how you would feel in each scenario. This will help you understand how realistic your fears or expectations are. Step 3: Analyze and Reflect Compare Decisions: Look at decisions made when you were in a high emotional state and compare them to those made after using emotion regulation techniques. Feedback : Whenever possible, discuss your decisions and decision-making process with trusted people. They can offer an outside perspective on your situation and help you identify times when your emotions have played a trick on you. Step 4: Practice and Improve Keep Practicing: Learning to regulate your emotions is a skill that requires constant practice. Consistently practice emotion regulation techniques and over time it will become natural to you. Over time and with constant practice, you will become an increasingly conscious and rational investor, able to make decisions based on logic and facts rather than emotional impulses. Exercise 4: Taking Risks scenariosA technique for visualizing the consequences of risky investments to overcome the overvaluation effectThe overvaluation effect can lead to overly risky investment decisions due to overconfidence in one's forecasts or analytical abilities. This "risky scenario" visualization exercise will help you work through different outcomes and evaluate their potential consequences to make smarter, more balanced decisions.Step 1: Identifying a Risky Investment Select an asset or investment strategy that you consider risky or about which you feel overconfident.Step 2: Visualizing Scenarios Best Outcome: Close your eyes and imagine everything going for the best. What emotions are you experiencing? How does this affect your life and finances? Worst Outcome: Now imagine a worst-case scenario. What will be the consequences? How are you feeling? Most likely outcome: After you have considered the extreme scenarios, try to visualize the most likely outcome. What do you think is most likely to happen?Step 3: Analysis and ReflectionComparing Scenarios: What lessons can you learn from this visualization? To what extent has your initial belief been confirmed or refuted? Realistic risk assessment: Reconsider your strategy based on these scenarios. Does it need to be adjusted to balance risks and rewards?Step 4: Real Life ApplicationStrategy Adjustment: Make any necessary adjustments to your investment strategy based on your analysis.Repetition of the Exercise: As time passes and market conditions change, it is recommended that you return to this exercise periodically to overestimate risks. Using this exercise can greatly improve your ability to rationally assess risks, which in turn can help overcome the overestimation effect and lead to more successful investment decisions. Conclusion Investing is a "science" and also an area where psychological biases and emotional reactions can play havoc with even the most experienced investors. Understanding these dynamics and applying tools to correct them are key to increasing your chances of success. Through a series of exercises such as self-observation and journaling, challenging beliefs, working with emotions and visualizing risky scenarios, you can learn to better understand your instinctive reactions and take steps towards)