What is Myopic Behavior?
Myopic behavior represents the behavior of an investor who acts in accordance with what he or she wants right now. In other words, investors demonstrate myopic behavior when they care only about short-term results with absolutely no consideration of how a certain action may affect them in the future. Myopic investors are unable to visualize the long-term effects of their current actions.
- Myopic behavior is a behavior based on the pursuance of short-term results and represents an action in regards to what one wants now, without taking into account any future consequences.
- Myopic behavior is a part of behavioral finance. It includes self-deception, heuristic simplification, emotions, and social influence factors.
The Principle Behind Myopic Behavior
From the perspective of psychology, human beings want to see instant results and gratification. Such a desire plays an important role in human lives.
For example, freshly baked cookies, two additional hours of sleep in the morning, a free taxi ride, etc. provide instant satisfaction and are pleasant to every individual. Dopamine is released into the blood, which makes everyone feel happy.
Economists consider such behavior as a high discount rate. We tend to overvalue the reward received now and undervalue the price to be paid in the future.
Myopic Behavior in Investing
Following the same logic from life examples, we become myopic while making investments or regular financial decisions.
Investors aim to make simple and safe investments. They desire certainty and want to reach their goals, being rewarded for the amount of the job done. The illusion of control influences financial myopia. The sense behind the financial myopia illusion is that investors can use current news and other market data available online to understand which adjustments need to be made to increase the surety of achieving the investors’ goals.
The main problem of the illusion is that, typically, such behavior lowers the overall return on investment, and as a result, reduces certainty more.
Media channels fuel the situation more by constantly reporting major news and stories around companies, portraying a sense of urgency. Such actions affect investors and encourage them to focus on short-term results. To put it another way, financial media impacts financial myopia.
The Costs of Myopic Behavior
Myopic behavior entails both financial and psychological costs. One can become too anxious and distracted by constantly evaluating short-term market performance. For example, it can incentivize a deliberate and thoughtful investor to abandon the existing long-term-oriented investment plan. It is because it does not yield the desired results in the short term, even though it would most likely achieve the goals in the long-term perspective.
The bottom line is financial myopia can satisfy an individual’s short-term emotions and desires, but it will do so at a huge long-term cost.
Myopic behavior is a part of behavioral finance.
What is Behavioral Finance?
Behavioral finance studies how psychology influences the behavior of investors or financial analysts. It is based on the fact that investors are not always rational, lack self-control limits, and are influenced by their own biases.
Behavioral finance includes the following buckets of biases and errors:
Self-deception is the concept of limiting ourselves while we learn. We mistakenly assume we know enough to make a well-thought-out decision, but it is actually not the case. We need some more information to do it.
2. Heuristic simplification
Heuristic simplification represents information-processing errors.
Emotions can lead investors to a huge failure should they be overconfident and overoptimistic, aiming to achieve their goals in the short-term perspective. Investors should avoid allowing their emotional states to influence financial decisions.
Emotions can ruin an investor’s investment portfolio performance, making the investor irrational.
4. Social influence
Social influence refers to a social impact on investor decisions. For example, a herding effect refers to the tendency of humans to go with the crowd, not against it. People simply do what others do because they assume it is safe, and others will not do anything harmful for themselves. Such a type of behavior is based more on emotion and instincts.
CFI offers the Commercial Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant resources below: