Building financial attitude - Investing theories, facts and much more

“Does Gen Z have a future?” 

This was the topic of research conducted recently by a famous organization. Apparently, the road ahead is uncertain especially when it comes to our financial fate (money matters).

A lot of us were at crossroads of our careers when the pandemic struck and we were left doubting and rethinking our plans (momos in Satya is final though). Even though companies made profits in the 1st quarter of 2020, none of the employees received any bonus nor any increment in their salaries. Promotion was also denied this year. Gen Z will have to prepare for the future and be ready for any situation (plans other than meeting your gang post lockdown) The older members are facing economic turmoil at work and the younger ones are seeing their opportunities diminish. 

The least we can do now is to make ourselves suitable for potential employers post this pandemic. Developing our skill set especially improving our financial literacy is the best thing to do as said by various professionals. Do some course (not just for certification), work with a startup or a company and learn how exactly the business world functions (again, not only for building your resume), start your own blog(Woah) or simply do marketing or investing (both of them makes up the corporate world).

According to a study by Ernst and Young, 57 percent of Gen Z responders said they prefer to save money than spend it immediately, which is a good thing only if we know how to make the best use of these savings. (yes we’re talking about investing).

We already know what investing is and how important it is for us. Thus today, we’ll be discussing some interesting (and controversial) theories behind investing.

ODD LOT THEORY

Remember the kid you always used to underestimate in your class? If he’s telling an answer it’ll surely be wrong. This is exactly the strategy some investors use in the financial markets. They do the opposite of what small investors do assuming that the small investors would be wrong every time. (so much confidence)

PROSPECT THEORY

Take 2 three-year-olds. Give one a piece of candy. Give the other two pieces of candy. Spend a few minutes doing your best to measure how much happier the one with two pieces of candy is. But then take away one piece of candy from the child with two pieces. Now, re-measure the happiness levels of both. Both have one piece of candy, but we all know that the child who had two, to begin with, will likely be experiencing a negative emotional response (frustration, anger, disbelief, full-blown Chernobyl-like melt-down). Their emotions are the result of how they ended up with their one piece of candy – not their identical end-result.

Emotional responses to gains and losses are not symmetrical. How this translates to investors: The pain of a loss is estimated as two times greater than the elation of a similar gain. This fact drives poor decision making, especially in investing.

This phenomenon is often referred to as myopic loss aversion. Prospect Theory helps to explain why the three-year-old who got her second piece of candy taken away will not be nearly as happy as the other, even though they both ended up with the same amount. 

For kid number two, 2-1 ≠ 1(We’re all feeling like that second kid now).

Prospect theory basically states that people's perceptions of gain and loss are skewed. That is, people are more afraid of a loss than they are encouraged by a gain. If people are given a choice of two different prospects, they will pick the one that they think has less chance of ending in a loss, rather than the one that offers the most gains. (sounds like the conservatism principle doesn't it?)

Investment education is essential—as is avoiding investments you don't fully understand. It is important to rely on sound recommendations from experienced investors while dismissing "hot tips" from untrustworthy sources. (gossips don't work here) Above all, always follow the good old advice of diversifying your holdings across a wide swath of assets.

"Wash your hands. Ignore the markets. Don’t touch your face. And don’t touch your stocks."

That is hard advice to follow but a really useful one. Very often the investors who have the best performance are the ones who trade the least.

DO YOU KNOW?

In the end, we have some really interesting facts for you (read, learn and happy investing)

• After seeing it hit a low point in 2009, Domino’s Pizza saw its stock grow 233 percent within a year after changing its pizza recipe.

• There is a ‘pirate stock exchange’ in Somalia where locals can invest in pirate gangs planning hijacking missions.

• The stock market got the names “bear and bull” because of Caballeros in California. The Caballeros put California grizzlies in battle with bulls. They observed bears swiped downward and bulls hooked upward, thus lending the analogy. This led to the California grizzly’s extinction.