Super Gann Trader Academy, which conducts share market classes in Chennai, offers free trader awareness lessons.
Mr Basheer has a credit card debt of Rs 35,000 and a high interest rate payment requirement of 24% per year. He also has Rs 50,000 in a savings’ account earning 4% or less. He has been saving this money for his son’s higher education since last year.
Mr Basheer could easily repay credit card debt and save more money every month by saving interest amount on credit card debt. However, he prefers to maintain credit card debt and savings separately as he views them as two different accounts.
Mr Raj wants to buy a new mobile phone. He goes to the shopping mall and checks the best offer available is for Rs 25000. Just when he is about to make purchase his friend informs him that same phone is available for Rs 20000 in a different store that is 5 Kms away. He decides to go to that stores and buys the same model mobile phone for 20000. He is very happy to save Rs 5000.
Next year Mr Raj decides to buy a new car. The car is costing 12.5 Lakhs. His friend tells him another dealer (five Kms away) can give him the same car model for 12.45 Lakhs. But he decides to complete the purchase and does not go for this additional saving of Rs 5000.
This behavior is common for us but it is not rational. Savings in the above examples was the same Rs 5000. However, in the first instance, Mr Raj was happy to save Rs 5000 as it was 20% of the original cost. In the second instance, the same Rs 5000 were less than 0.5%. However, it is important to note that the Rs 5000 in both cases have the same value. It does not matter how it was saved.
This kind of irrational behavior is due to mental accounting. This mental accounting behavior is a blind spot in our rational thinking. It causes us to make systematic judgmental errors throughout our life. Being in blind spot, we do not realize such errors of judgement in our actions.
We make similar errors of judgement in our investment and trading. Such errors compound and cause us to lose a fortune over our life time.
Investors and traders take much higher risks (sometimes even blind risks) while investing/trading with their market profits as compared to their savings. This causes them to lose money in the market.
Money is money, whether it is a profit from market investment or part of our savings. We need to be equally diligent in our risk assessment before all making investment decisions.
Join our share market training in Mumbai to learn more on such judgmental errors and how to prevent them. This is a practical course that will allow you to learn and avoid systematic errors to help you compound your savings over your lifetime.
Here the List of Blogs in this Series
- Mentality of people while they are doing trading
- The Magical Power of compounding
- Ignorance is not bliss
- What is herd behavior?
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