In the financial market, the psychological fluctuations of retail investors resemble a dramatic soap opera, filled with ups and downs, from passionate engagement to awkward exits, all full of drama and absurdity. This article will reveal the psychological 'performance' behind each stage, from the entry of retail investors to the final cutting of losses.
1. Entry: The stage dominated by dreams of wealth.
The psychological state of retail investors at the time of entry is like a modern gold rush scene. They are filled with thoughts of wealth freedom, dizzy from various 'wealth myths,' completely ignoring how the market sets traps.
Key driving factors:
Market heat: Screenshots of profits in friend circles, investment 'mentors' on social media make retail investors feel that missing opportunities is a huge regret in life.
Herd mentality: Everyone else is making money, how can I fall behind?
Greed-driven: The fantasy of 'guaranteed profit' completely erases their basic judgment.
Psychological characteristics:
Overly excited, confidence soaring, as if wealth is already beckoning to them.
Naively believing every sweet word in the market.
Typical behavior of retail investors:
Blindly chasing rises, buying at high points, fearing that if they are late, there will be no chance.
Easily believing various rumors, even too lazy to look at the fundamentals.
2. Holding: The honeymoon phase of blind optimism and ignorance.
After entering, the short-term rise in asset prices makes retail investors' emotions soar as if they are on a roller coaster. They start to feel like the chosen ones, believing that the market's rules exist for them.
Key driving factors:
Confirmation bias: Only listening to voices that are favorable to oneself and automatically blocking any warnings.
Attribution effect: Gains are because of my wisdom and strength; losses? Just a minor episode in the market.
Psychological characteristics:
Erroneously believing that making money is a given.
Completely ignoring risks and even thinking that 'risk' is someone else's problem.
Typical behavior of retail investors:
Start adding positions, fantasizing about doubling returns with leverage.
Excitedly recommending their investment secrets to those around them, as if they have mastered the code to wealth.
3. Early decline: The stage of self-deception.
When the market starts to reverse and prices drop, retail investors' first reaction is not to stop losses, but to various forms of self-comfort. They firmly believe this is just a 'correction' and that prices will rise again sooner or later.
Key driving factors:
Psychological defense mechanism: When facing losses, retail investors choose to turn a blind eye or even fabricate excuses to numb themselves.
Anchoring effect: Obsessing over the buying price, always fantasizing that prices will return to the original point.
Psychological characteristics:
Strong denial of reality, refusing to accept their judgment errors.
Blindly persisting, even thinking that 'cutting losses' is an act of cowardice.
Typical behavior of retail investors:
Stop checking accounts, praying for a miraculous market reversal.
Looking for other 'fellow sufferers' on forums to find warmth in each other.
4. Deep decline: The struggle of panic and confusion.
As the market continues to decline and paper losses become unignorable, retail investors start to feel real panic. The emotional fluctuations at this stage can be regarded as the climax of the market comedy.
Key driving factors:
Loss aversion: Unwilling to face the reality of losses, always thinking of waiting a bit longer, perhaps a miracle will happen.
Contradictory mentality: Afraid that the market will rebound after selling, yet unable to bear the pressure of holding on.
Psychological characteristics:
Regretting every day for not cutting losses yesterday, yet fantasizing that cutting losses today might be a mistake.
Anxiety intensifies, even starting to doubt life.
Typical behavior of retail investors:
Frequent monitoring, feeling like their heart is being cut as they watch asset prices fall.
Searching everywhere on social media for guidance, only to see more chaotic advice.
5. Cutting losses and leaving the market: A desperate self-redemption.
When the market falls to the point where retail investors are exhausted, they finally cut their losses. In that moment, retail investors seem to have undergone a painful 'spiritual baptism.'
Key driving factors:
Psychological collapse: Continuous losses have left retail investors with no hope, only wanting to escape as soon as possible.
Helpless choice: Rather than continue to endure the torment, it's better to cut the losses and not see them, thereby avoiding distress.
Psychological characteristics:
Filled with anger and distrust towards the market, feeling like a victim of being 'harvested.'
Self-denial, even completely losing confidence in their abilities.
Typical behavior of retail investors:
After cutting losses, they close their trading software, swearing never to invest again.
Complaining about the unfairness of the market on forums, seeking resonance.
6. After the market rebounds: The finale of regret and self-mockery.
Usually, not long after retail investors cut their losses, the market rebounds. The psychological state at this stage can be regarded as the black humor ending of the entire story.
Key driving factors:
Regretful emotions: 'If I had known, I wouldn't have cut losses!'
Self-contradiction: Wanting to re-enter the market while fearing being cut again.
Psychological characteristics:
Regret and remorse take the upper hand.
Beginning to self-mock their 'bad luck,' as if investing is destined to be unrelated to them.
Typical behavior of retail investors:
Some people re-enter the market, trying to turn the tables, but may repeat the same mistakes.
Some people completely exit the market, becoming mere spectators of market stories.
How to break this ridiculous cycle?
Learn basic knowledge: Study financial knowledge more to avoid being brainwashed by 'wealth myths.'
Set clear plans: Establish clear rules for profit and loss to avoid emotional trading.
Manage emotions: Recognize that market fluctuations are normal and do not let short-term fluctuations lead you by the nose.
Diversify risks: Avoid betting on a single asset to make investments more stable.
Retail investors' performance in the market is not only a seasoning for the market ecosystem but also a real enactment of a human comedy. Understanding these psychological mechanisms may not completely avoid being 'harvested,' but at least it allows us to stand a little longer on this ridiculous stage.