Investor nerves have been jangling since Covid-19 infected the stock market. Some strategists say a vicious bear market is ahead, while others argue that investors have overreacted, divergent opinions mirrored in the confused market reaction – after suffering their worst week since the financial crisis, stocks subsequently enjoyed their biggest one-day gain in 11 years.
Behavioural finance experts will tell you that keeping your cool is never easy during any market correction but today’s environment is particularly emotional and uncertain. Here are three behavioural biases all investors need to be aware of in the current climate.
Intolerance of uncertainty
Financial commentators habitually trot out the old cliche that markets hate uncertainty, and there’s certainly no shortage of that right now. How far will the infection spread? How long will it last? How will consumers and workers react? If draconian containment measures are enacted, how much economic damage is likely? History provides few clues. “This is kind of a new thing,” as Nobel economist Robert Shiller has noted. “It’s too much to ask for the market to get it right.” Shiller’s uncertainty is echoed by New York-based Tanaka Capital, which says we “don’t know what the limits are and we don’t know where it’s going to peak”.
Article Source: click here.