Recently, the price of gold has risen rapidly, and market sentiment has heated up significantly. Historical experience shows that the more violent the asset price rises, the easier it is for traders' cognitive biases to be amplified. People often misjudge "trend continuation" as an "inevitable result", attribute "short-term gains" to "own abilities", and even give up risk assessment out of fear of "missing out". Wmax Behavioral Finance Series reminds: The real risk is not in the market itself, but in the way we misunderstand the market.

The reversal of loss aversion: from "fear of losing" to "fear of missing out"

Loss aversion (Loss Aversion) usually manifests as "unwillingness to stop losses", but in strong market conditions, it will appear in another form - Fear of Missing Out (FOMO, Fear of Missing Out). When we see the price of gold continuously breaking new highs and social media being flooded with voices saying "it's too late if you don't get on the bus", your brain will equate "not participating" with "actual loss", thus triggering a strong impulse to take action.

This psychological mechanism is extremely confusing: it is disguised as "opportunity seizing", but in fact it is still a variant of loss aversion. Research shows that the subsequent position discipline of positions opened driven by FOMO is significantly weaker than planned transactions, and they are more likely to panic sell during callbacks, forming a cycle of "taking orders at high levels and cutting meat at low levels".

Overconfidence: Treating luck as ability

Continuous profits, especially when catching up with the big market, can easily lead to overconfidence bias. Traders tend to attribute success to their own judgment and ignore macro conditions, loose liquidity, or sheer randomness. This "illusion of control" can lead to overweight positions, relaxed stop losses, and even abandonment of original rules.

Nobel Prize winner Daniel Kahneman pointed out: "The human brain is naturally good at making up causal stories, even if there is no real connection between events." In the context of the skyrocketing gold price, the sentence "I have long seen the de-dollarization trend" may be just a post-hoc rationalization rather than real decision-making logic. Differentiating between "right" and "lucky" is the key to long-term survival.

Groupthink: Loss of independent judgment in consensus

When a certain point of view (such as "Gold must break $5,000") becomes the mainstream narrative in the market, individuals can easily fall into groupthink. People unconsciously filter out negative information, focus only on supporting evidence, and view doubters as “outdated.” This pressure to conform has been further amplified in the social media era, forming an “information cocoon”.

Behavioral experiments show that even if participants know that the group's judgment is wrong, more than 1/3 of the people will still choose to agree in the absence of social support. In the current hot discussion environment about gold, maintaining the courage to "think contrarianly" - for example, asking yourself: "What will be the signal if my bullish logic is wrong?" - is an effective tool to resist cognitive homogeneity.

Distorted mental accounting: using "floating profits" to cover up real risks

After their assets have surged, many people will regard the "floating profits" in their accounts as "riskable funds" and thus relax their risk control standards. This phenomenon is called the mental accounting bias: dividing funds in the same account into different "accounts" based on source or status, and assigning different risk tolerances.

For example, the idea that "the principal cannot be lost, but the money earned can be gambled" essentially confuses the homogeneity of funds. Regardless of the source, each dollar of exposure should be based on an overall portfolio affordability assessment. Using floating profits to cover up real risks often leads to profit taking or even turning profits into losses.

How to stay sane in a frenzy?

To combat irrationality, we cannot rely on willpower, but on institutionalized rules. First of all, adhere to "state the logic and exit conditions before opening a position" to avoid emotional involvement in decision-making; secondly, limit the frequency of daily account checking to reduce the emotional disturbance of immediate feedback; thirdly, conduct "counterfactual thinking" regularly: If the market turns, what is my response plan?

More importantly, accept the fact that you don't need to catch every move. There are always opportunities in the financial market, but there is only one principal. Wmax Behavioral Finance Series does not provide shortcuts to getting rich, but only wants to be a mirror that reflects the psychological undercurrents hidden beneath the K-line.