The Lollapalooza Effect and SIP.

“The secret of changes is to focus all of your energy, not on fighting the old, but on building the new.”

– Socrates

For the last two weeks, we have been discussing in detail what “The Lollapalooza Effect ” is and “How the lollapalooza effect and the solutions in the market?” Today we are going to discuss how The Lollapalooza Effect is working in SIP Marketing.

SIP itself is not a bad thing to do, but the way we are doing is definitely, Here we will see how it has been monetised by getting affected through various Bias.

Biases involved in creating the Lollapalooza effect in SIP.

1, Authority Bias:
Authority bias is the tendency to attribute greater accuracy to the opinion of an authority figure (unrelated to its content) and be more influenced by that opinion. In short, we tend to follow the leaders.

The authority bias favours the opinions of authority figures within the team rather than considering the ideas of the whole group. This bias works under the assumption that those in authority positions have better innovation skills than those in lower positions. This closes off these possibilities for innovation by simply not considering them.

Another version of this bias is that any innovative ideas that come from other than authority is worthless. This can put you down at risk and make you frustrated altogether.

Alerting Statements:

“You should not time the market.”
“Nobody can time the market.”

2, Social Proof – Herding:
We all want to be independent contrarian investors. Unfortunately, most of us run with the herd. Herding is the tendency for individuals to mimic the actions of a larger group. This bias is intentionally developed in MFD’s mind by encouraging MFDs to grab the titles of SIP Kings.

“SIP Karo Mast Raho.”
“SIP Karo Bhul Jao.”

How do we deal with herd mentality bias:

By doing Risk Management.”

3. Anchoring or Confirmation Bias:
The main problem with investors is cherry-picking data that already confirms what they are thinking. 

Essentially, confirmation bias is our inability to separate our inclinations and dislikes from what is going on. You think that emerging markets are going to perform well, you tend to read articles that support your thinking. The problem with only looking for information that supports your ideas, you’re only getting half the picture.

Only the tendency to listen to information that confirms one’s preconceptions makes it difficult to get a fresh view. In some cases, meaningful communication. – “It doesn’t sit well with what we already know.”

4. Optimism and Overconfidence – SIP never fails:
Having a good year in the markets? That overconfidence could be forcing you to take unnecessary risks with your portfolio. When we are riding high, we tend to think that we are invincible.

That feeling helps reinforce the idea that we never make mistakes, our picks and investments always win, etc. When this sentiment is combined with other behavioural finance quirks, investors use to make weak investment decisions.

5. Cognitive Bias and Recency Bias:
When investors think that recent events will continue forever, this is a case of recency bias. The best example is “Down Fall is temporary Growth” is Permanent they never accept that the Market may fall also. Recency bias results in investors giving more importance to recent events than historical events.

In 2010, one of the legendary investors of India showcased this chart.

How do you deal with recency bias:
First, you have to admit that changing lanes, given the recent track record of returns, don’t work to change which fund or which asset class you invest in. An asset class that does well today may not do well tomorrow.

And secondly, have a Risk Management strategy and stick to it.

6. Bandwagon Bias: The probability of a person adopting a belief increases in direct correlation with the number of people who hold the belief. It is a powerful form of group thinking. Also referred to as herd mentality. My fallow MFDs are becoming a SIP King, so I will also become a SIP king

7. Disposition Effect Bias: This refers to a tendency to label investments as winners or losers. Disposition effect bias can lead an investor to hang onto an investment that no longer has any upside or sell a winning investment too early to make up for previous losses.

Disposition In SIP:

When the market is low, more units will be gained (Forget valuations).

When the market is high, valuations are high (Forget Units).

8. Trend-chasing Bias: Investors often chase past performance in the mistaken belief that historical returns predict future investment performance. Always measure the current risk involved in the market as well as Risk Appetite. Offering Only SIP is not suitable for every situation

Whenever the market is trending high, SIP book will be at its high

9. Availability Bias: We tend to make decisions based on readily available information. When we are repeatedly exposed to a particular product or idea through interaction or advertising, it is stored in our minds, waiting to be recalled at a moment’s notice.

Then how to come out of this phenomenon? 

Remember that God has gifted you the three most important scenes:

  1.  Set of Eyes – See whatever is shown to you.
  2.  Set of Ears – Listen to whatever is said to you.
    but the most important is 
  3. Do not forget that same God has gifted you a Set of Brain for processing the information, use it and take your own independent decision.

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Most important note: The objective of this Blog is to share knowledge and info about new ideas/opportunities in Mutual Fund. Neither is this trading website, nor an analyst website, nor an advisory website. For Mutual Fund Investment success, always do your homework, own analysis, and make your own decisions.

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