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Beranda / Emotion In Investing

Emotion In Investing


Investing is often presented as a numbers game—charts, ratios, forecasts, and models. In reality, emotion is one of the most powerful forces in markets, and often the most underestimated.

For leaders, executives, and serious investors, understanding emotion is not a soft skill.
It is a risk management discipline.

The Myth of the Rational Investor

Most investors believe they make decisions based on logic.
Most losses, however, are driven by emotion.

Fear, greed, regret, and overconfidence shape behavior in ways that no spreadsheet can fully capture. Markets don’t just move on information—they move on how people feel about that information.

The gap between strategy and outcome is often emotional, not analytical.

The Two Emotions That Move Markets

1. Fear

Fear dominates during downturns and uncertainty.

  • Selling too late

  • Selling too much

  • Freezing when action is required

Fear turns temporary volatility into permanent loss.

2. Greed

Greed appears during momentum and optimism.

  • Chasing returns

  • Ignoring valuation

  • Increasing risk without increasing understanding

Greed converts opportunity into overexposure.

Most investors oscillate between these two states—rarely operating in the calm center.

Why Smart People Still Make Emotional Mistakes

Experience and intelligence do not eliminate emotional bias. In fact, they can sometimes magnify it.

Common traps include:

  • Overconfidence after a series of wins

  • Confirmation bias, seeking data that supports existing beliefs

  • Loss aversion, holding bad positions to avoid admitting mistakes

  • Recency bias, assuming the recent past will repeat

These are human tendencies—not personal failures.

The CEO-Level Perspective

Seasoned decision-makers don’t try to eliminate emotion.
They design systems that prevent emotion from dominating decisions.

They ask:

  • What decisions are most vulnerable to emotional error?

  • Where do I need rules instead of judgment?

  • When should I slow down rather than act fast?

This mindset treats emotion as a variable to manage, not a flaw to deny.

Practical Ways to Manage Emotion in Investing

Effective investors rely on structure:

  • Predefined entry and exit rules

  • Position sizing limits

  • Diversification aligned with risk tolerance

  • Time separation between decision and execution

The goal is not to remove feeling—but to reduce its authority at critical moments.

Emotion as Information, Not Instruction

Emotions themselves are not useless. They can signal:

  • Excessive risk

  • Crowded trades

  • Misalignment with personal or organizational tolerance

But emotions should inform review—not dictate action.

Feeling anxious does not automatically mean “sell.”
Feeling excited does not automatically mean “buy.”

From Reaction to Discipline

The most consistent investors are not those with the best forecasts.
They are those with the best emotional governance.

They understand that:

  • Markets will always provoke emotion

  • Volatility is inevitable

  • Discipline is a competitive advantage

In this sense, emotional control becomes a form of alpha.


Summary:

Humans are all emotional being. We do not always make decisions rationally. Emotion is part of us as investors. Investors might feel better towards stocks at certain point or they might feel that owning stocks are risky and avoid it at all cost.



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Article Body:

Humans are all emotional being. We do not always make decisions rationally. Emotion is part of us as investors. Investors might feel better towards stocks at certain point or they might feel that owning stocks are risky and avoid it at all cost.


Investors may also feel attached towards a specific company and continue owning the stock without regards to its fundamental. For example, you might like Google's search engine so much that you decide to buy the stock at $ 350 without doing any research. You figure that Google's search engine is so much better that buying the stock will give you profit, right? Wrong. Now, I am not here to bash Google as an investment, but analyzing an investment goes beyond the products and companies. Most investors can identify good companies and products. It is quite easy. You know that a Mercedes is a better car than a Ford or a Civic.


The next question is how much should you pay for a Mercedes or a Civic? This requires us to put aside our emotion for a second and think clearly. Sure, you'd like to have a Mercedes in your life. It is luxurious and have a lot more fancy features than a Civic has. But, that does not mean you should overpay for it. It works similar with stock investing.


Google is a good search engine, probably the best that is ever produced so far. Sure, you probably pay more for Google than other generic search engines. But, please don't over pay. You invest in Google to profit from it not because you like its products.


So, how do we eliminate emotion from our investing decision? We can't eliminate it completely but there are certainly tools that might help. One is to calculate the fair value of a common stock that you are investing in. I covered this plenty of times but basically, the fair value of an investment is dependent upon the streams of profit generated by it. In the long run, if company A earns more than company B, then company A will be valued more than company B.


For a company that is growing such as Google, you can incorporate its growth and calculate the fair value with growth. I have talked about this once and you are welcomed to check our commentary section.


I know I don't exactly give you the best solution to the problem. Emotion is hard to ignore. I am not immune to that. But following your emotion will cost you a lot of money. Just watch those investors that bought during the NASDAQ peak in 2000. Don't follow the herd and keep your focus on the fair value of your stock. You will do really really well.