Have you ever made an investment based on a gut feeling? Or based solely on a tip you received from a friend? Perhaps you’ve bought something just because you really felt like buying it at the time?
“If you have, then your behaviour might be considered rash and irrational by academics,” says PhD candidate Anirudh Dhawan. But you’re not alone. In one study, “rash” decisions were found to be costing individuals investing in Taiwanese stocks $6.5 billion a year.
Investors seem to care too much about the price
Dhawan’s PhD research examines whether small changes could help investors make better investment decisions: the first involves letting people spend more time before they make a decision while the second involves asking them a question relevant to their investment.
“I found that both these changes make people think harder about their decisions, but only the question helps reduce their losses,” Dhawan says.
“It turns out that in order to be effective a change needs to not only make you think harder about your investment decision but also make you consider information you might be ignoring otherwise.
This is what our question does.”
Stocks like all other everyday products have two important elements: value and price, he explains. However, unlike other products the value of a stock is not subjective. It is the same for everyone and it can be calculated mathematically.
“Both the value and the price are important for an investment decision. However, investors seem to care too much about the price and too little about the value. Our question helps them think about the value of a stock as well. This is what helps them make better investment decisions.”
Anirudh Dhawan is a doctoral candidate with the Finance group at UTS Business School. His principal supervisor is Professor Talis Putnins.
UTS Experts: Talis Putnins