Mental Gymnastics: 3 Common Psychological Tricks Consumers and Investors Can’t Seem to Resist

Both consumer and investor behavior have extensive overlap in the Venn diagram of life. The same marketing triggers that work on consumers, tend to also work on investors. Simply seeing the word “free” is enough to flood the brain with enough dopamine to make us feel happy, and we end up responding irrationally. Investing can cause logical people to behave out of character, sometimes appearing to have lost their wits. This summer, daytraders clamored to pour money into Hertz’s worthless stock, simply because their peers were doing it. 300 years ago, Isaac Newton—a mathematician with the ability to calculate logarithms to 50 places—was blinded by irrationality, ignored the numbers and subsequently lost a fortune. So, what causes us to behave like loons when money is on the line? Turns out, it’s all in our heads.

Anchoring

Consumers unconsciously cling to the first piece of information offered, such as price, using it as a benchmark for future decisions—whether it makes sense or not. This is tantamount to putting a thought in someone’s head with the hopes it will later influence their behavior. Anchoring tends to present itself as overconfidence in the investing ecosystem, but the principle remains the same. It’s common for investors to fail to revise their initial perceptions when confronted with new information, when instead they should keep an open mind and remain flexible because the market changes everyday. 

Loss aversion

Bad memories haunt both consumers and investors the same. That’s because the psychological pain of losing is twice the amount of the pleasure experienced from a gain. We’re emotional decision-makers, whether we buy toothpaste or stocks, and we don’t like losing or getting a bad deal. This attitude means there’s more likelihood that a consumer will take risks to avoid losing something, rather than taking a chance to gain something. This consumer attitude translates into the investment sphere, which is when an investor is determined to make some of their money back and won’t cut their losses.

Confirmation bias

Consumers aren’t the only ones who rely on social proof for signals on what to buy. Investors, like consumers, make decisions based on social norms, as they seek to gain acceptance from others. Investors behave this way when they ask and answer their own questions about an investment. There’s no doubt that those Hertz investors were deluding themselves, and each other, over their abysmal investment, which clearly made no sense and lost money. A dose of objective reality would have gone a long way towards avoiding this giant red flag.

Consumers and investors alike, are known to abandon all logic in the presence of a ‘good deal’ and we’re more than happy to allow false signals to cloud our perception and judgment. So, the next time you take your wallet out to buy or invest, consider what’s propelling that urge. It could be your inner loon masquerading as sensibility.

The Practical Possibilities of Equity Crowdfunding

3 Reasons To Consider  Equity Crowdfunding As Your Next Investment

Robinhood Isn’t The Only Equity Investment Option Available to Eager New Traders