Mr. Jay Prakash Gupta is Founder of Dhan (www.dhan.co) (A technology platform for super traders and long term investors) and Co-Founder, Raise Financial Services. Alumnus of IIM Ahmedabad. A seasoned market expert, Jay carries with him over 18 years of rich experience in the financial sector. An extremely knowledgeable and thorough professional, he is widely exposed to the practical world of equity, commodity, currency and other financial segment. Mr. Gupta founded Moneylicious Securities with a vision of a company that understands the need from an investor’s perspective and then offers the best available ethical financial solution. Through impactful initiatives, he has grown Moneylicious manifold over the years apart from being recognized internationally as a team to reckon with. Moneylicious is now part of Raise Financial Services where Mr. Gupta is a Co-Founder.
We are living in a digital age and technology is driving and reshaping our lives faster than we could imagine. The way we Shop, Work, Choose Activity, Meet People, Communicate, Travel and Manage our Health and Finances have become technology dependent. Artificial Intelligence and Data Science is helping corporations to gain fresh insights into consumer behaviour and is being applied to every part of company’s value chain.
Companies today focus on consumer pain points and try to address them by building Apps and products which removes the friction from transactions. There has been a democratization of information which has reduced Information asymmetry significantly. Access to information is universal and is available real time whether someone is in Silicon Valley or in a small town in any developing nation which has internet connectivity. AI and Automation is helping corporations create a superior customer experience by reducing customer response time.
The impact of technology in Financial Services has been profound. For a long period of time large banks and brokerages ruled the financial services Industry and New Entrantsfound it difficult to break in. Technology has helped these new entrants in getting into and disrupting the domain once controlled by established players. The innovative technology has helped companies in simplifying everything from Payments to Insurance, from Investing to banking.
With such revolutionary changes and with access to information and tools to execute transactions, have we become smarter in making better investing decisions than our predecessors or are we still the same indecisive lot driven by emotions, greed, and fear?
Often while investing, our brain does exactly opposite to what it is supposed to do. We believe that one should invest when markets are at a low and should sell when it is at its peak, but we shy away from buying stocks when markets correct. We know that panic selling is a bad idea, but we try to jump the wagon impulsively even at a trivial news which we come across. $4 bn worth of market value of Coca cola was wiped off in a day when a renowned footballer kept two bottles of Coke aside during post-match press conference. We know chasing hot stocks is a bad idea but, we buy impulsively when we see our neighbour, friends and people around buy the same stock. We sell stock when it goes up by a nominal percentage and hold on to investments even while it keeps falling.
How do we explain such behaviour? Though it may not make any logical sense but makes emotional sense. Unlike machine, it makes us irrational. It makes us Human. It is not that people with no formal education, no investing experience does it. People with the best of education, best of investing experience and connections also behave the same way. Two people with similar IQ, similar qualification will behave differently with their money and investments. While one individual sells his holdings when certain crisis or negative news hits and at the same time other person holds on, remains indecisive till the value gets wiped out.
Investing is not hard science and not guided by rules and laws unlike Physics and Mathematics. It is more to do with behaviour. Our brains since ages were designed to improve our odds of survival and avoid whatever worsens the odds. We react to threats either perceived or real. It is our Reptilian brain or Ancestral brain where such signals originate. Emotional circuits in our brains make us instinctively crave for rewards and ignore situations which increases the chances of losing the reward. Our frontal brain or the modern brain, which is rational has no match to the emotional power of the parts of the ancestral brain.
That is one of the reasons that when we are in a zone of indecisiveness, and overwhelmed with negative news around, our brain perceives threat to financial well-being. Our instinctive ancestral brain takes over the rational frontal brain and we act emotionally rather than rationally. The action translates into selling as it gives a feeling of protecting your financial well-being from further harm. Survival matters more than finding logic.
Advances in Data Science and advancement in finance help us in calculating Beta and historical prices. We can calculate portfolio allocation using co-variances and various statistical tools. We know co-relation between Inflation, Interest rates, valuations, gold prices and Equity. It is not what we know about concepts that ensures financial success, rather what goes inside our brain when we try to make investing decisions and how we control it makes all the difference.
` More knowledgeable but less patient
Along with all the great achievements and breakthrough in technology, also comes the unfathomable access to information. Our brain is not prepared to handle and process so much of information. It tries to absorb the ones which needs less energy and those which are easy to understand. We are accustomed to speed; we want quick results. Humans today are less patient than what they were two decades before. We look for Instant gratification. We upload something on social media and expect likes instantly, we buy something and want to sell and make a quick buck on our investments. We want faster computers, faster internet, and telephone networks. A few seconds delay in uploading or receiving information makes us impatient. We invest with an objective to create wealth, and wealth creation requires patience. Focus on short term volatility, paying too much attention to prices, are detrimental to the returns and in turn the objective of Investing.
Can technological advancement help us in altering the behaviour towards Investing?
Technology with the help of neuroscience can alter human behaviour. It would bring another set of challenges, most prominent among them would be controlling the intent of those who would have authority (state or corporation) to alter human behaviour.
Human beings today inhabit modern world along with ingrained behaviour and traits of its ancestors. Most of the concepts in technology related to finance are new, like other traits, Humans shall adapt to it naturally over time. Till then let us enjoy the moment as Human Beings, after all it sounds better than being called as Human Machines.