Some are unfazed by large drops in stock prices, and even view them as buying opportunities (“Buffett-like investors”).
Others curtail their stock holdings when the market incurs a steep drop, but don’t completely pull out of stocks (“nervous investors”).
There also are many who get out of stocks completely during a bear market (“panic investors”) out of fear of incurring further losses.
Given wide variances in how each investor reacts to bear markets— the aggregate data does imply, however, that Buffett-like investors are likely a comparatively small group. More people probably fall into the nervous and panic investor groups. This is not surprising, given the human inclination to be risk-averse.
As Daniel Kahneman and Amos Tversky demonstrated with “prospect theory,” we feel the pain of losses much more than we derive pleasure from gains.
Compounding matters, we humans commonly engage in hyperbolic discounting, which means we place greater value on rewards received sooner rather than later.
When the market falls and stocks are sold, we see the immediate value of avoiding further losses.
What isn’t considered are the potential future gains forfeited by not continuing to stick with stocks or, better yet, by rebalancing and allocating more money into stocks.