Harding phenomena in behavioral  trading

Harding phenomena in behavioral trading

Harding phenomenon

 


What is the ''Harding phenomenon''?
The harding phenomenon is a word that comes from the English word "Herd" (flock), and means that human beings tend to act according to the thoughts of others and many people.    Speaking of phenomena that are familiar to us, we buy products that are in fashion, and the queues call for more queues.The Harding phenomenon is known as one of the insights in "behavioral economics", but a synonym in behavioral economics may be the "bandwagon effect".   Behavioral economics has the perspective that "humans seem to be rational and behave irrationally" and "the economy created by humans also has irrationality born from such a psychological aspect", and stock investment and economy It can be said that it is one of the academic fields that are attracting attention in economics. We can see this tape of irrational behavioral action lots of times in financial markets when we see when price makes big divergence  agains company fundamentals. 

 

Is behavioral finance useful for investment?

 

Behavioral finance is the study of the influence of psychology on the behavior of investors or financial analysts. It also includes the subsequent effects on the markets. It focuses on the fact that investors are not always rational, have limits to their self-control, and are influenced by their own biases.


An example of the harding phenomenon in stock investment is the case where the stocks being bought are bought further and the high price is renewed.  In addition, it can be said that the irrationality of the harding phenomenon was glimpsed in the bubble formation of the subprime loan market that started the Lehman shock.   

Especially if you are a beginner in investment, you may intuitively think that the stocks that are going up will go up even more, and you may buy them and grab a high price. Behavioral economics proposes that human beings have the property of "heuristics" in which they make decisions based on past experience, apart from making logical thoughts when making decisions.  For example, this heuristic works well when multiplying and when making daily habits, but when it comes to investing, that thought can be a nuisance. Emotional investment decisions that are not based on rules do not have a statistical advantage and the method does not always work.   It is often said that "90% of individual investors lose", but many of them include failures due to lack of understanding of human irrationality and psychology. Isn't it?     Then, what kind of attitude should we take in investing so that we do not lose 90%?

 

Metacognition is important


In trading, it can be said that there is no way of thinking or method that "if you do this, you will definitely win", but what is important is "metacognition".  "Meta" is a prefix that means "beyond" and "contains", and "metacognition" means "recognizing cognition."   It is confusing to write cognition as cognition, but it can be said that it refers to the state of being able to see oneself objectively, what one is thinking.
What I am doing now can only be expressed from my own experience.   However, by reading a book or learning a new concept, you will be able to express that behavior in a new way.


Behavioral economics focuses on human scientific psychology, and human psychology such as "status quo bias" and "loss effect" will help us to see our thoughts and actions objectively.
If you are an investor, you will understand that you can trade calmly when you are winning, but you will panic or your mentality will be shaken when you are losing and you will make an appropriate trade. I think you have some experience.   Of course, everyone suffers failures and losses, but in order to reflect on them and improve them, it is of course important to omit "why did they fail?"   In the process, metacognition may be useful for verbalizing and embodying failure.   How to acquire metacognition   As a way to acquire metacognition, as I wrote earlier, reading a book to acquire new knowledge and making it a habit to draw a cycle to improve one's behavior can be mentioned. It may be a good idea to notice ideas and habits that you are not aware of and try to live while being aware of how to correct them.


If you know the word "harding phenomenon", you should have the perspective of "because it is a harding phenomenon, isn't it profitable to make a contrarian here?" Can be done.  It will be possible to broaden the range of investment and thinking by not only synchronizing with the way of thinking around you, but also by firmly holding your own investment axis.   Learning the knowledge of behavioral economics, not limited to the Harding phenomenon, is useful for making investments, so it may be good to learn it.

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