The psychology of risk involves staying with uncertainty, managing your emotions and not making decisions based on how you feel. Risk involves making a decision when you don't know what to do and not being certain of the outcome. The higher level of risk, the higher level of anxiety and the higher level of loss or gains involved.
Risk is easier when we have real information that we can analyse but when under uncertain conditions such as analysing the economy where past success does not determine future success and there are may variables that can influence outcome, risk can be influenced by your own biases. When uncertain, we can fall under the illusory pattern recognition where we see patterns that are not there. For example, where there is a pattern with eclipses and the stock market and the consumption of alcohol and the economy. While there are many investors that work hard to analyse the data, most of the market is random. Past success can create and illusion of control and increase risk taking. People who have an illusion of control and take more risks are more likely to fail to see the limits of their abilities and make poor investment outcomes while blaming external sources instead of their own limitations. Most successful traders won't take a risk when there is a lot of uncertainty but will stay with their stocks while there is volatility. Their choice is to do nothing when they don't know what to do. They will manage their emotions and allow the market to ride the ups and downs, while other people will make decisions based on their emotions which is usually driven by media hype. During volatility your best strategy may be to manage your emotions while not acting. It is important to understand the market, learn about strategy and how to you manage your own behaviour including emotions when trading. This also goes for managing money in general including learning how to stick to your budget, your relationship and managing emotions when buying or selling property and how your relationship to money is affecting your relationships to others. One way people will manage their emotions including anxiety is to predict the future, which is another fallacy. The psychology of risk involves understanding your risk tolerance and if you have a low tolerance for risk and there is high volatility in the market, then you may decide to consider not acting as your emotions will override rational decision making. Listening to your emotions is important but sometimes we need to step back and reflect before acting. Disclaimer: The information provided above is not financial advice but intended for general information only. If you need help with improving your financial literacy and support to improve your financial behaviour and mental health, contact us today. For specific financial advice you can reach out to a financial planner.
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AuthorArticles about mental health, money and behavior Archives
February 2024
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