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Average Investors Behavior May Surprise You

Updated: Nov 16, 2017

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There is a different approach in which an individual investor would seek to make a lucrative investment in Apple, Inc. as opposed to making a lucrative investment XYZ Corporation. An investor who exhibits familiarity bias could consider Apple to be a safe stock to buy because of its well-known brand name and its management. Apple is known all around the world for the products they offer, it is a large American company with a good reputation and is ran by a white male named Timothy. There is less risk associated with the company not because of the actual technical indicators but because of personal biases such as name induced social bias. XYZ Corporation is a virtual unknown in the market.


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For the purposes of this discussion, lets say the XYZ Corporation is a US based company with the majority of its operations in Colombia and Ecuador. This stock immediately for no concrete technical reason would be associated with risk just for the fact that it has operations in two relatively unstable countries with a management lead by a Jose. This in turn, would probably cause the investor to consider this more risky stock but in return expect to receive a higher return on his/her investment. It is possible as well that since this stock is a virtual unknown, there are less people buying it which could in turn mean that it is more probable that is undervalued compared to an Apple stock who everyone knows about and buys and is probably overpriced. Due to these biases one approach to make a lucrative investment in Apple could be to actively trade in order to take advantage of the small swings in stock price. On the other hand, the approach to making a lucrative investment in stock XYZ Corporation could be to buy at a time in which the investor considers the stock undervalued and holds the stock until its price increases significantly.

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Analyzing the difference between the cost of a $10 beer bottle on the beach versus the cost of a $10 beer bottle at a nice restaurant helps puts this reasoning into context. $10 for a bottle of beer is fair when there is a low supply of beer at the beach and a lot of people wanting to buy beer. At a restaurant however it is fair to buy a $10 beer when everyone in the restaurant is paying that amount and simply put, $10 for a beer is accepted by everyone else. People are likely to overpay when they are informed of this and realize that they no have other choice than to buy the $10 beer. Also a $10 beer would be justified maybe if the buyer knew someone else would buy the same beer for $15 an hour later. If you compare the $10 beer to financial assets, then the price of a financial asset has nothing to do with the financial asset itself but rather with how the investor perceives the financial asset. They would systematically be underpriced and overpriced depending heavily on the supply and demand.




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