For investors, strong desires and delusions can be extremely dangerous
For investors, strong desire and delusion are extremely dangerous
In the world of investing, it is well known that desire and delusion are very dangerous. When desire grows strong, people lose their rationality and may engage in high-risk investments or invest excessively. Similarly, when delusion becomes strong, one may overestimate the future value of the investment target, increasing the risk of losses.
The impact of desire on investment
The impact of desire on investment is significant and includes the following:
- More likely to engage in high-risk investments
- More likely to invest excessively
- More likely to overestimate the ability to recover losses
The tendency to engage in high-risk investments comes from a strong desire to achieve large profits in a short period. Therefore, even high-risk investments are viewed with the possibility of large profits in mind. For example, leveraged investments and investments in emerging markets are high risk and carry a high risk of losses. However, with strong desire, it becomes easier to take these investments, increasing the risk of losses.
The tendency to invest excessively also stems from a strong desire to gain more profit. As a result, one may invest beyond reasonable limits rather than staying within a feasible range. For example, investing multiple times the income is excessive and increases the risk of losses.
The tendency to overestimate the ability to recover losses also arises from strong desire, which makes one eager to quickly recover losses. Therefore, even after incurring losses, one may take on even higher-risk investments to recoup them. For example, increasing positions in a losing stock or starting new investments to make up for losses leads to overconfident investment behavior that aims to recover losses.
The impact of delusion on investment
The impact of delusion on investment is also significant, including the following:
- More likely to overestimate the future value of the investment target
- More likely to underestimate the risk of the investment target
The tendency to overestimate the future value of the investment target arises because strong delusion leads to overly optimistic expectations for the target's future growth and success. As a result, the future value is estimated higher than reality, increasing the risk of losses. For example, investments in startups or growth stocks attract investors because of expected future growth and success. However, with strong delusion, these targets' future value can be overestimated, increasing the risk of losses.
The tendency to underestimate the risk of the investment target is because strong delusion makes one downplay the target's risk. Thus, the risk is estimated lower than reality, increasing the risk of losses. For example, leveraged investments or investments in emerging markets are high risk. Yet, with strong delusion, these risks may be underestimated, increasing the risk of losses.
How to control desire and delusion as an investor
To control desire and delusion as an investor, it is important to be mindful of the following:
- Clarify investment goals
- Understand the risks of investment targets
- Do not be swayed by emotions
By clarifying investment goals, the direction of investment becomes clear, and judgments are less likely to be swayed by desire or delusion. Understanding the risks helps prevent overestimation of future value or underestimation of risk. Furthermore, not being swayed by emotions enables calm, rational decision-making.
Summary
For investors, desire and delusion are extremely dangerous. When desire grows strong, people may engage in high-risk investments or invest excessively. When delusion grows strong, they may overestimate the future value of the investment target and incur higher risk of losses.
To control desire and delusion as an investor, it is important to clarify investment goals, understand the risks of investment targets, and not be swayed by emotions.
