Understanding Analysis Paralysis

Analysis Paralysis is a situation where an individual tend to overthink/analyze a particular situation causing delay in decision making or unable to reach a solution within a normal time frame due to abundance of alternatives. This later creates a sense of regret & anxiety among people for not being able to take  decision on time. Hence, People can't seem to settle on one option due to continuous arguments about the positives & negatives of each alternative.

Analysis Paralysis in the stock Market

Similarly Analysis Paralysis is very common in the Stock market & every trader/investor encounters it at some point in their trading journey. Stock market is a very complex and dynamic field which requires strategic decision making from the investors. While staying informed about the market is crucial, many times it leads to excess information which in turn leads to confusion.

Why do we become victims of Analysis Paralysis?

Analysis Paralysis is more of a Psychological term & its cause may also differ from person to person. But most of the common causes why people face this problem include:

Fear of Making Wrong Choice :

There’s a tendency among people to be skeptical about their decision and with the presence of many sectors & many stocks inside it, there always remains fear among investors, “What if this stock doesn’t perform like i had evaluated?”

Unclear Objectives :

Another reason why people face Analysis Paralysis is because of unclear objective. People may enter stock market as a trader with an ambition of making quick bucks but due to Fluctuations in the market, they may end up holding on to the losses in their trade hoping the market to get back to the level where they entered just so that they can sell and exit the market which happens rarely as they finally had to book out all their losses due to their own personal reasons. Also due to unclear risk tolerance capacity & investment goal it becomes difficult for investors to make decisions.

Information Overload :

There are many sources where investor can get knowledge & due to curiosity investor end up accessing to many available resource which increases the confusion among investors. Many unauthorized sources lead to misleading information through which investor become Paralyzed through Analysis

Desire for perfection :

There’s always a desire among people to be flawless. We want our decisions to be the best so, however good the analysis may be, investors always remain in fear about their decision so they can’t make it to their final decision.

Lack of confidence :

Confidence plays a vital role in the decision making process. But due to lack of confidence, Investors can’t get to the decision & continue their research & fall in a loop which ends in missed opportunity.

Real Life scenario of Analysis Paralysis in Stock Market

For example, an investor who continuously monitors financial news, reports, analyze technical indicators may have adequate information about the stock market which indeed is very essential, but in the end, they might find difficult to make decision due to conflicting alternatives & fear of making the wrong choice. Ultimately, this results in missed opportunity impacting investor's portfolio & anxiety.

Till date there are more than 240 companies listed on Nepal stock exchange & This offers investors various options to choose from, but even with deep  analysis, there's a common worry among investors. They wonder if they could make more profit by investing in different shares or sectors . Also, an investor who invested in a particular stock for a long term through detailed analysis may end up changing his/her strategy due to short-term fluctuation in the market.

Let's dive into this situation with a trader's perspective, You may be a dedicated trader with good knowledge about all technical terms & indicators &  might have identified certain entry & exit points in the market, but due to excessive research & perfectly waiting for the right opportunity, you might have missed that good opportunity. Additionally, remember  when a particular stock send you mixed signals, it might have been made even more harder to make decision.

Overcoming Analysis Paralysis in Stock Market

Analysis Paralysis can occur when a person is about to make a big decision in his life whether it's about an investment decision or about his/her personal life. Here are some of the ways you can avoid Analysis Paralysis.

Clarify your Investment Objective - First step to avoid Analysis Paralysis identifying what do you want to achieve from your investment? Is your investment goal for the long term or short term? How much risk can you tolerate? Which industry are you willing to invest in? The answers to these questions can definitely clear your doubts & help you in decision making.

Limit Information Overload - Information is very crucial in the stock market but don’t bombard yourself with tons of information because it may lead you unable to make decision & you are more likely to miss that opportunity. Design a certain criteria based on objective & only evaluate information based on the criteria. Also avoid using complex technical indicators you don’t fully understand as they may increase your confusion.

Quick decision Making - People struggle a lot while making decisions due to Analysis Paralysis. Another remedy to the problem maybe to use the 5 second rule by Mel Robbins. This method is yet another simple but very effective method that facilitates you  to make quick decision without overthinking & hesitation, trusting your instinct. When you come across such situation give yourself a time of 5 second, and take immediate decision without hesitation, this process allows you to avoid  worrying about possible negative consequence of the action.Eventually,There’s a high chance about your decision being the right choice.

Take a Break - Take a break of minutes, hour or day from decision making process/ research is yet another simple but very effective point to take better decision. This break re-energizes your mind, this can help you avoid Analysis Paralysis significantly. You can simply do Meditation, go for a walk or a hike .

Don’t be Desperate - We investor become so desperate to take the trade & this desperation many times may lead to wrong decisions on the market. Be patient and design a well structured plan, then move towards the final decision.

Conclusion

Analysis Paralysis is a very common term among investors whether it be experienced or new ones. It’s a natural phenomena among humans to be overwhelmed over more alternatives. While endless analysis may seem to be the path to perfect decision , it may often lead to more confusion. So, follow the concept of “good enough”, set boundaries for the research, take a break, and follow your intuition. This way you can overcome one of the most common problems of the investors and the traders.