In today’s global economy, the irrationality of the market participants is often the underlying cause for too many troubles. Behavioural finance has discovered several psychological biases that prompt investors to act in, well, not particularly sensible ways. TheMarketsTrust, an aspiring financial technology company, is pleased to provide you with the TheMarketsTrust (TMT) Index Family, a fresh and valuable tool for investment strategy validation and risk management.
A tendency for potential losses to appear larger in our minds than potential gains: Loss Aversion is a self-enforcing mechanism. Extreme losses on the markets are actually created by the Loss Aversion of the market’s participants who rush to sell.
The overconfidence effect is a psychological bias in which our confidence in the decisions we make is greater than the objective accuracy of those decisions. Strengthened by the "social proof" effect, over-confidence may spread like an epidemic.
The economic decisions of governments and central banks are often motivated politically. Short-term gains in popularity rather than long-term vision are the driving force. At the same time financial markets always over-react to political irrationality.