The Hindu Business Line : <I>The greed factor </I>

Consider this. You decide to buy a car. You find that the price of the car that you wanted to buy has increased by Rs 25,000. What do you do? Chances are you will wait till the price comes down. Or if you need a car urgently, you might decide to buy another model that is cheaper.

But what if you want to buy a stock? Suppose the stock price has gone up Rs 15 before you could buy it. If you are like many other traders/investors, you may want to buy the stock anyway. Why the difference in buying behaviour?

When we see a stock perform well and also hear our friends talk about it, we become enthusiastic about owning it. That is why most uniformed investors/traders tend to buy stocks even after they move up.

Of course, watching a stock move up gives us the confidence that it will move up further. And if the stock indeed does, chances are that we will attribute the success to our skills.

But what if the stock instead comes down after you buy it? Chances are you will continue holding it till it moves up again.

Contrast this with buying a car. You buy a car to use it. You simply postpone your consumption if you do not buy it now because the price has increased. On the other hand, if you do not buy a stock because it has just moved up and then it moves up further, you lose an opportunity to make profits. That stock price movements are readily available makes it easy for us to monitor the missed opportunity. The greed factor primarily accounts for the difference in our behaviour.

(The author is based in Ontario, Canada)

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