Rebound Effect in Stock Investing

I haven't shared articles on behavioral finance for a long time. In the last few articles, we have deepened in technical and fundamental analysis and covered different topics. Of course, there will be more of these articles, but when I look at the number of readings, I observe that there is more interest in my investor psychology articles. Therefore, today we will continue with the “backfire effect” and in the next article we will continue with a surprise topic. In daily life, we have all felt internal resistance when confronted with a false belief. Perhaps one of the most common situations arises in its relationship to technical analysis, where stock investors attempt to predict market movements. This resistance may be a reflection of a psychological phenomenon called the “backfire effect.” In this article, I will focus on what mistakes stock investors make due to this bias and what they can do to reduce this effect.

What Is The Backfire Effect?

The backfire effect means that when someone learns facts against their previously held wrong belief they reject these facts and strengthen their belief even further instead. For example, if an investor sees that a trend determined by technical analysis goes in another direction he/she might defend his/her current strategy more rigidly rather than facing reality. Investors may experience cognitive dissonance which we call mental discomfort when encountering information inconsistent with their strategies.
Many situations we encounter daily show the backfire effect which leads us towards certain beliefs but strengthens them as we face realities contradicting them even further. The world of politics might provide some striking examples for this effect.
Imagine an individual supports policies from specific political leaders but then gets shaken by misinformation surfacing over time about those leaders' actions or intentions When truths emerge initially individuals often react by defending existing beliefs even stronger - here's where the backfire effect comes into play!
For instance: If someone learns about particular leader making false claims regarding something it can trigger inner conflict leading person strengthening his/her own views instead accepting truth They tend lean toward defending personal opinions So first you ignore evidence conflicting your thoughts then resort confirmation bias (another common prejudice among investors) solidify ideas By doing so you exaggerate people/events agreeing while dismissing opposing data/thoughts without taking seriously You only choose information confirming idea just preserve status quo.

There are two main elements involved in backfire effects:

• Searching for information aligning our beliefs
• Rejecting contrary views
• And several reasons why it occurs:
• We don’t like being proven wrong
• We seek consistency
• We’re emotionally attached to our beliefs

At this point let’s take aside concept 'belief'. To succeed at stock exchange merely drawing knowledge-based analyses isn't enough – psychological factors also bear great significance sometimes becoming forefront context Belief factor plays crucial role decision-making process amongst investors But how well can you make right decisions meeting something contradicts?

Backfire effects demonstrate tendency protect faith despite introduction opposite perspectives It's kind defense mechanism Have negative news emerged company invested despite all analyses? Now admitting reality becomes hard
If you also lose money trying maintain viewpoint stress experienced during decision-making process will increase become complicated We're not talking solely equity investment here – should avoid extremes whenever meet situation contradicting faith
Our interested area investments thus let's give examples accordingly Suppose developed strong confidence Company X will achieve great success future However one day hears news unexpected financial difficulty This point can kick investor may tend uphold belief despite negative news leading him/her make decisions like not selling shares even if share value drops or investing more Congratulations! You've become forced long-term investor You can console yourself saying "It'll recover eventually."

Imagine an investor uses technical analysis tools to evaluate the performance of a stock in the future. A world filled with charts, indicators, formations and even algo trading whispers predictions about price movements in his ear. But one day, due to a mistake made in technical analysis, he realizes that his previous beliefs were wrong.
Here's where backfire effect comes into play. Instead of accepting this mistake, the investor might tend to defend his current strategy. Psychologically speaking, instead of coping with disappointment following a wrong decision he/she might want to strengthen existing belief further which could complicate objective evaluation financial decisions.


If you are someone who is considering investing based on technical analysis in the chart above, you are likely to sell at the place I have shown in the green triangle, but being deceived by a single indicator may cause you to miss an almost 50% profit opportunity. Before you invest in a stock, you enter the market by believing in the strategy you have in mind. You have evidence to support this through technical analysis or fundamental analysis, or you have heard about a sector and have firm beliefs that it will grow in the future. In fact, this belief does not develop only with a thought coming from your own inner world; Environmental factors or different people's opinions also affect this. For example, an expert's article, an analyst report, or any information you hear from your friend can be one of these effects.

There is no problem as long as your analysis and sensations come together, but what if the balance is disrupted? The rebound effect can often work in conjunction with confirmation bias, where investors accept information that supports their existing beliefs, to cause perceptions to become completely distorted. The investor feels bad when he encounters information that shows that his current belief is wrong. After this feeling, he looks for a shortcut and follows what he believes he knows best in order to avoid experiencing negative emotions, because the negative emotion experienced makes it difficult for the person to accept new information. It is almost impossible for the person in question to change his or her beliefs, especially when it comes to sensitive issues such as political preferences, ideology, and identity.

So, what can we do to minimize this impact in our investment decisions?

Achieving success in stock investing requires not only strict adherence to one method of analysis but also an openness to alternative views. This helps you evaluate the markets more objectively through your analysis. However, it is important to take a deliberate approach to maintain this flexibility and avoid the backfire effect.

Be open to new information, accept changing your beliefs:

As an investor, regularly review your current strategies and beliefs. Be open to new economic data and market trends. For example, if you are an investor who adopts a long-term investment strategy, you can review your own strategy to keep up with changes in market dynamics.

Separate your feelings and thoughts:

When faced with market fluctuations or unexpected news, try to control your emotional reactions. Be careful to distinguish the difference between anxiety about a stock losing value and making an objective analysis. Making emotional decisions can often increase the rebound effect.

Be a good listener, find common ground:

Listen to different opinions when making investment decisions. Be a good listener to understand other investors' analysis and strategies. It is not difficult to develop a common understanding by evaluating different perspectives.

Take your time, do your research properly:

Hasty decisions are often based on incomplete information or misunderstandings. For example, to make an accurate assessment of a company's stock, conduct detailed research that includes financial reports, industry analyzes and future projections.

Get together with people with different perspectives:

Interact with people with different investment strategies. Different perspectives can enrich your own thought process and help you make more informed decisions. For example, an investor is considering investing in a particular stock based on technical analysis. However, he also notices that another company operating in the same industry is in a stronger position based on fundamental analysis. In this case, the investor should be open to an alternative view. Combining technical analysis with the information provided by fundamental analysis can allow for a more balanced decision-making process.

Confirm the accuracy of your information with different sources, do not stick to a single type of analysis:

Use a variety of sources to verify the information on which to base your decisions. Relying on a single source can be full of misinformation. For example, when you hear a positive recommendation about a stock, check different financial analyzes that support that recommendation. If other views are dominant, it is useful to stop and think.

Be aware of your biases:

It is important to understand your own biases and be able to deal with them. For example, consider any positive or negative biases you may have toward a particular industry or company. Consider how these biases affect your investment decisions.