Prices in financial markets are determined by the attitude of investors to the emerging economic and financial environment rather than by the environment itself. This means that price fluctuations will be determined by the hopes, fears, and expectations of the crowd as they attempt to downplay future events and their biases toward them. Your job is to try as much as possible to ignore those around you and form an independent opinion while making a genuine attempt to overcome your own prejudices.
The markets themselves are driven by crowd emotions. Nothing you can do will change that; it is a fact that you have to accept. Despite this, becoming a successful investor demands that you overcome your mental deficiencies and rise above the crowd. As a natural result, you will find yourself outside the consensus.
Beliefs, Not Prejudices
The character and psychological make up of each individual is unique. This means that some of us come to the marketplace with more biases than others. In this respect, it is important to note that many of our prejudices are shaped and influenced by our experiences. Someone who has suffered a great deal from financial insecurity through bankruptcy or a recent job loss, for example, is much less likely to take risk when investing. A given piece of bad news will send this person scurrying to his broker to sell. On the other hand, another investor may have had the opposite, pleasant experience of receiving a raise or an unexpected inheritance. Such an individual would come to the marketplace with a completely different outlook and would be much more likely to weather any storms. By the same token, this more fortunate person would be more likely to approach the markets with an overconfident swagger. Since such an attitude results in muddled thinking and careless decision making, this individual also would come to the marketplace with an disadvantage.
So we see that neither person is objective, because his actions are based on his experiences rather than on his beliefs. In the preceding example, both investors acted on impulse, not logical thought. The confident investor made the right decision, but he was lucky. If the price had dropped, the fearful investor would have come out in a relatively better position than his self-assured counterpart. Thus, for any of us, achieving objectivity involves different challenges based on our characteristics-whether they be bullish, bearish, daring, or cautious-and shaped by our unique experiences.