Investment Psychology: Overconfidence, Memory Bias, Self-Handicapping

This assignment provides a psychological analysis of investment behaviors, focusing on overconfidence, memory bias, and self-handicapping. It explores how these biases affect investment decisions and suggests strategies to mitigate their negative impacts. The analysis emphasizes the importance of realistic expectations, disciplined investment strategies, and the role of self-affirmation in reducing self-handicapping. The assignment also addresses key factors for successful investors, such as hard work, determination, patience, and risk-taking. Furthermore, it considers the ethical dimensions of investment decisions, stressing the importance of aligning investment choices with societal ethics. The document includes references to relevant research and literature on investor behavior and financial decision-making.

Investment Psychological Analysis
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Overconfidence, memory bias, and self-handicapping
Overconfidence in investment is persistent overvaluation of an own investment decision
which increases with deviation from optimal choices, task complexity involving a number of
risks and may decrease with individual’s perceived uncertainty (Daniel and Hirshleifer, 2015,
pp.61-88). On the other hand, memory bias is the tendency which affects our behaviors and our
perspectives based on some predetermined mental notions and some beliefs. Self-handicapping is
when investors try to explain any possible future poor performance with a reason that may not be
true where they avoid the effort in the hopes of keeping potential failure from full accountability.
From a psychological standpoint, memory bias is more productive compared to overconfidence
and self-handicapping.
Investors need confidence in order to be able to make fast-paced decisions and risk
money in a business environment. But overconfidence has lead to entering more investments
than necessary and for some leading to bigger losses. To overcome overconfidence, it is
important for an investor to set realistic expectations as no investment always outperforms,
revisit your investment decisions over time on a regular basis, rely on a disciplined investment
strategy where it should help an investor make decisions based on numbers and not intuition
about a certain area of the market. Another way to overcome overconfidence is to have a process
in place that helps to mitigate the risks. Investors can minimize memory bias by keeping a record
of all the original decisions and reviewing them regularly to avoid deviation from the original
plan. Finally, understanding self-handicapping condition is important as self-affirmation is very
effective in reducing self-handicapping behavior among investors

Open-ended questions
Question 1
From all the skills we have learned, we realize that there are many key factors which
make the investors successful. Among the major key factors which define successful investors
include hard work, determination, patience, risk-taking, among other factors (Peterson et al.,
2011).
Hard work. All the successful investors must be hard working for them to attend to the many
duties and commitments which need their attention for their investments to keep on growing.
Lazy people rarely prosper in investments as they neglect most of their duties making their
investments and enterprises to fall.
Determination. Investors need to be highly-determined people who don’t give up even on the
worst scenarios which tend to pull their investments down. In cases of losses and downfalls, the
investors just change their investment strategies to embrace other new strategies which will help
them to make some profits.
Patience. This is another key factor which defines successful investors. The investors must
persevere all the hard situations in their investments and remain patient as they wait for the hard
situations to change and favor their investments.
Risk taking. All the successful investors are great risk takers who are ready to take huge risks in
their lives with the hopes that the huge amount of capital they use for their investments will bear
some fruits (Fenghua et al., 2014). Indeed, in most cases, these investors have ended up enjoying
the benefits of their risks as most of their investments end up succeeding and generating some
profits.

There are many other key factors which the investors should embrace for them to be successful
in their investments. All the investments are risks but with these key factors in mind and practice,
these investments have ended up generating huge returns to the investors.
Question 2
As investors, the most important factors which we should consider before making any
investment deal are the returns and the risks associated with the investment deal. Generally,
investors are profits-oriented and most of them accept any deal which seems to generate some
good returns or profits even though we may have some risks associated with the investment deal
(Jung and Dobbin, 2012, pp.51-53). However, as much as investors are profit-oriented, it’s good
to consider the ethics of our societies to make sure the deals won’t interfere with the ethics which
govern our society. In this given case which gives a return of 6% and a risk of 2%, I would
consider both the investment and the psychological (or the ethical) side of view to make an
informed decision of whether to accept the investment deal or not. A careful consideration of the
deal shows the deal gives more returns than the risks to be incurred which will make me as an
investor to accept the deal, but at the same time be careful not to interfere with the ethics of our
societies (Ferrell and Fraedrich, 2015). If I have to be unethical for the deal to be completed, I’ll
decline the investment deal for the sake of the ethics of the society.

References
David Daniel and Kent Hirshleifer, 2015. Overconfident investors, predictable returns, and
excessive trading. Journal of Economic Perspectives, 29(4), pp. 61-88.
Yang Fenghua, Wen Zhifang, He Zhifeng, and Dai Xiaoguang, 2014. Characteristics of
investors'risk preference for stock markets. Economic Computation \& Economic Cybernetics
Studies & Research, 48(3).
John Ferrell and Odies Fraedrich, 2015. Business ethics: Ethical decision making & cases.
s.l.:Nelson Education.
Frank Jung and Jiwook Dobbin, 2012. Finance and institutional investors. The Oxford Handbook
of the Sociology of Finance, pp. 51-53.
Nofsinger, J. R., 2016. The psychology of investing. s.l.:Routledge.
R Peterson, RL Murtha, FF Harbour, and AM Friesen, 2011. The Personality Traits of
Successful Investors During the US Stock Market’s “Lost Decade” of 2000-2010. MarketPsych
LLC New York, Volume 2, p. 10.