Over the past 10 years, the Sensex returned 13% compounded annually; but how many retail investors have been able to achieve this return? Statistical models are devoid of emotional decision-making. Humans are not. You can’t simulate what it feels like to be patient and exercise your will power. From May 2014 onwards, retail investors have continued to pour in money in to equity mutual funds. As many as 21 lakh investor accounts or mutual fund folios were added in the six months ended September 2015. Would investors with a high emotional intelligence be able to drown out all the noise and hype about the market and invest sensibly? It’s tough.
An academic research titled “Emotional Intelligence and risk taking in investment decision-making” by a group of researchers from the University of Padova (Italy), concluded that individuals with high emotional intelligence (EI) are more able to manage stress and peer relations. They are more sensitive to emotional cues such as the effects of mood induction. Other studies have found that participants with high EI made significantly better decisions in a social gambling task compared with those who have EI.
The results of the study demonstrated that participants with higher EI are consistently more likely to invest compared with participants with lower EI. Investing behaviour is influenced by individual differences in perceiving and managing emotions. On the flip side, people with high EI invested more often, regardless of the positive or negative expected value of the task. They are more likely to take risks even when this may not be the most advantageous strategy. Thus, people with high EI may engage in excessive trading and could be penalised by the high turnover of its portfolios.
Since emotional feedback is often experienced in an automatic, unconscious way, it may negatively impact decision-making because its effect is not recognised when people are trying to make conscious, informed decisions. For instance, an investor may understand that a specific stock is losing value and she should sell it, but she ends up holding it in her portfolio anticipating the regret she would experience if the stock recovers. There are plenty of intelligent participants in the financial markets, but all do not focus on their EI. This is what truly sets successful investors apart.