Investors’ Buying Behavior 101 by Mawunyo Adjei
What influences the buying decisions of investors? Why do investors buy the kind of stocks they buy? This is what investor buying behavior entails. Gaining knowledge of the buying behaviors of investors is very necessary. Brokerage firms can use it to analyze customer needs. Publicly listed companies can also take advantage of such information to know the areas to be more focused on. Companies can take advantage of such information to direct traffic of investors into their business by identifying the standard requirements from investors, thereby sky-rocketing their market value. Moreover, it aids individual investors to gain mastery over their feelings and emotions when it comes to buying decisions. Besides, it can make anyone the world’s greatest stock picker. However, it can make anyone lead the pack of stock traders and investors by buying into stocks that are going to be in huge demand in the near-term, before pool of investors come flooding into the stock, causing prices to rise.
Investor buying behaviorists use observable behaviors and introspection in understanding investors’ buying decisions. Started by J.B. Watson, Behaviorism studies the relationship between stimulus and response. It involves how investors respond or react to information including those from the media, financial advisors, colleagues in social groups and the buzz in the market.
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You can be fascinated with something and be reluctant to put money into it, whiles you could gladly invest in something though you will never personally use such products. Warren Buffett has praised Jeff Bezos’ business model a number of times calling him “the best CEO in US” but the billionaire investor has never bought shares of Amazon (NASDAQ:AMZN). However, while speaking at the recent Delivering Alpha Conference by Cnbc, Carl Icahn stated about the Herbalife (NYSE: HLF) shakes; “I personally don’t like the drink. I drank it, gave me a lot of gas. I didn’t like it. But a lot of people like the damn drink.” It is one thing for investors to be fascinated about a product and it’s another thing for them to put their money into it. So what influences investors to put their money in a stock or business?
The approach of investment managers differ from the approach of individual investors just as the preferences of ‘Gen X’ investors differ from the preferences of ‘Gen Z’ investors. However, there are certain observable behaviors which are evident in almost all investors including impulse buying behaviors and other emotions.
Reference points play a vital role in investors’ buying decisions. An investor is likely to buy into a stock that reminds him of something unique be it his childhood days or a brand that reminds him of a much bigger brand due to some practices or models they may both have in common. An investor may buy into a newly listed e-commerce stock with a judgment that they may become the next Amazon (NASDAQ: AMZN). The mental imaging a stock’s brand creates can attract lots of long-term investors. The eye is a very powerful sense organ which transmits information to the brain. If an investor sees a particular product or building name almost anywhere he goes, he becomes curious to know more about the company. The investor may be likely to buy such a stock even if he just stumbles upon it on the market since the information is stored up in his subconscious mind.
Cass Sunstein, co-author of Nudge wrote in an April, 2014 article for Bloomberg View;
“Behavioral scientists have shown that if something has happened in the recent past, it is cognitively ‘available’, and people tend to exaggerate the probability that it will happen in the future.” He added that “Human beings tend to focus on worst case scenarios, especially when their emotions are running high, and not on the likelihood that such scenarios will actually come about. They sell stocks too quickly when it has appreciated in price while holding on too long to stocks that have depreciated”
Investors usually buy into opportunities. Market outcomes and recent price movements also trigger investors to buy or sell more stocks. Their judgments or expectations of the economy, future per share price of a stock or corporate earnings are other influencing factors on investors’ buying decisions. Past performances of stocks leave extrapolative perceptions in the minds of investors. Carl Icahn wrote in a recent statement regarding Herbalife (NYSE: HLF) “Obsessions concerning the value of stocks are the undoing of many investors because they often blind you to the facts, and it becomes impossible to see the forest for the trees.”
About the author:
Mawunyo Adjei is the founder of GoodOldNews Inc. a business news media about stocks and startups. He is an Investor Buying Behaviorist researching why investors buy the stocks they do.