Earnings Season Frenzy: Avoiding Emotional Investing by Tackling Cognitive Biases
Earnings season can be a roller coaster, with stock prices spiking up or down just before and after earnings announcements. It’s tempting to look at financial media to predict what will happen or make sense of things, but often, this only confuses us more. Cognitive biases like availability bias, confirmation bias, and overconfidence bias kick into high gear, leading us to make emotional investing decisions.
Take my friend Norm, for example. He invested in FRC right before earnings and sold the stock when he was 12% up, afraid of potential bad news. He didn’t know much about FRC but felt the “risk was too high” and he said that if the stock drops he will buy it back. When FRC fell 50% that day, he didn’t buy it back, and when it fell another 20%, he still didn’t. He thought he’d made the right choice because it kept falling. But he had no real understanding of FRC’s value or potential.
Take my friend Norm, for example. He invested in FRC right before earnings and sold the stock when he was 12% up, afraid of potential bad news. He didn’t know much about FRC but felt the “risk was too high” and he said that if the stock drops he will buy it back. When FRC fell 50% that day, he didn’t buy it back, and when it fell another 20%, he still didn’t. He thought he’d made the right choice because it kept falling. But he had no real understanding of FRC’s value or potential.
The next day, before $亞馬遜 (AMZN.US)$ reported earnings, Norm, with barely any investing experience, boldly predicted that Amazon would go up 7% because of their great report. This was like bluffing in cards—without understanding the company or how people perceive the results, he couldn’t accurately predict the market’s reaction. Although AMZN did go up 10% right after earnings, it ended the day 2% down, proving that trying to predict short-term market movements is like trying to see through a bluff with no information.
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