So it’s all good, right? You have been having a winning streak and profits never looked better. You feel euphoric, that means you are very happy and excited. So what is to talk about here? Is there a need to be killjoys?
Euphoria is good. Joy is good. We could even say that greed is good, as Gordon Gekko famously stated so when we make profit, we should by all means, enjoy it. But there is a catch. The catch is that the euphoric trend will most certainly reverse sooner or later and that’s because happiness and excitement increases risk taking. When happy, we feel confident and tend to under-analyse the available info.
Richard L. Peterson and Frank F. Murtha in their very informative book “Market Psych, how to manage fear and built your investor identity”, state that people in positive mood:
- reduce the complexity of decisions
- tend to simplify information retrieval processes
- do not take into account information that they consider irrelevant
- do not really double check information
- make decisions faster
- take more risk in low stake gambles and less risk in high stake gambles
- are more resilient after losses and do not dwell into failures
As it is evident from the above, positive mood such as happiness, joy or euphoria has obvious advantages but also a significant drawback; it reduces our ability to accurately estimate risk.