You have invested 25% of his capital in a share that your analysis predicted growth. Your expectations, however, did not materialize. The price steadily falls. You think, “I did such a thorough and detailed analysis. I spent a lot of time learning the fundamentals of this company.
I can’t believe she’s falling”. At this point You hope that the position will reverse and refuse to close it. Easier to keep an open mind, than to admit the wrong decision and make loss. This is called the price effect of flooding: the person increases the debt on a losing position just because spent a lot of time, effort and/or money.
The most obvious and clear example of the effect of the prices of the flooding – when we have invested a large percentage of their capital in a losing position and do not want to admit that you have lost what you invested. However, there are other, more subtle ways the effect of flooding prices. Most people don’t see them, but they can influence investment decisions.
The old adage “time is money” illustrates that there are other ways in which you can “lose money”, only spending time and energy on investment. For example, You study Tsvetelina are researching a specific company. You read the message on its fundamental indicators, and daily follow the stock price, noting price changes that correspond to company announcements and significant events in the industry. The more effort You expend in preparing and analyzing the price of sinking. There is a strong desire to justify the time and effort You have spent. Otherwise, why so much time and energy to spend on this company, if you do not invest the capital? This desire to want to justify your behavior will gnaw You, and if You don’t know it, and not try to control it, You will tend to want to invest (long or short) in stocks, even when you know you have to stand on the sidelines and wait for another opportunity. Good to know about this subtle effect. Ask yourself – “do I want to invest because I see a real possibility, or am I just trying to justify the effort? “It is important to know how this unconscious but powerful influence can lead You to make decisions which later have to regret.
To overcome this effect is difficult. Well carefully study of the company and profit from emerging opportunities, just don’t overdo it. Remember, the expenditure of much effort causes a subconscious effect. Try to overcome it. Remind yourself that You are not required to invest. Your analysis and preparation is ever required to return a hundredfold, and yet learn to wait for the right opportunity.
Be aware of the subliminal and overt ways in which the price effect of flooding can affect your behavior. Try to see, whether really the price of flooding affect your decisions. Try to rationally counteract it.