The Psychology of Investing

Abstract

The eminent physicist Eugene P. Wigner once observed that scientists were incredibly fortunate in that nature behaves in a manner that can be described by precise mathematical formulas. But anyone who has invested in the stock market knows that the laws of economics are intimately connected to human psychology. It is not clear whether there are laws governing human psychology in the same way that the law of gravity determines the orbits of heavenly bodies, but if they exist they have not yet been found. It is generally accepted that if you want to invest in the stocks of a company, you must not only look into the economic state of that company and predict its future but must anticipate as well how other investors will view that company (some “technical” investors are only concerned with how other investors view that company, as we shall see). This brings us to the subject of this chapter, investor psychology.