Peer Effect on your investment decisions

Lot of our choices and decisions are depend on the society we live in and persons with whom we associate. We usually wear what is the current trend by observing the society surrounded by us. Some of our investment decisions also simply follow this human behavior. This is called peer effect on your investment decisions.

You may find such effects when you particularly notice a group of friends or co-workers following same trend of investment decisions. Suppose Mr.X is convinced and decided to go on with purchasing in any insurance product then he passes this message to his friends too, and Mr.Y (friend of Mr.X) thought it is good to buy, because Mr.X is knowledgeable and it may be good to follow him. This decision actually may not be a well decision. Because Mr.X’s insurance requirements and needs may be different from Mr.Y’s.

You may notice such things even in stock market too. When any news break out about Rakesh Jhunjhunwala’s  (I just took the example) new stock acquisition, suddenly that stock price will definitely rise. Reason is the same peer effect. He is investing in that particular stock means something good about that stock, so we too need to follow. Is it a joke or what? Suppose after few days stock lost around 50% then Rakesh jhunjhunwala have capability to sustain such loss. But are you??

It happens mainly because of 3 reasons.

1) Investor have no idea about his own investing decisions.

2) Lot of faith on the person who is with him and about his knowledge.

3) Returns generated from the investment done by that expert.

It is good to gather information about investment ideas. But following blindly may harm your financial life in long run. Because each person have his own unique financial goals, risk taking ability and financial commitments. Hence blindly following the other’s decision mean you are actually following his financial life but not your own.

Hence while taking any investment decisions, gather information about the product you are choosing, analyze whether that product actually suites your financial needs and goals or not. Then take the decision of going with that product.