The financial market operates on the assumption that investors make transactions with the goal of maximizing profit and minimizing losses. While this theory holds merit, human beings are not robots—our emotions often guide our decisions, sometimes preventing us from acting rationally.

Since we can never fully overcome our innate emotional biases, it is crucial to recognize the emotions that influence our investment behavior and use this awareness to make smarter choices.

The 14 Stages of Investment Psychology

There is a well-documented cycle in investment psychology that outlines how emotions evolve during market fluctuations. Understanding these phases can help us manage our decisions and avoid panic-driven actions.

📈 The Upward Phase (Active Investment Period)

1. Optimism – A positive outlook instills confidence in the future, prompting investors to purchase assets.

2. Excitement – Early successes create enthusiasm, fueling the search for even greater opportunities.

3. Thrill – Investors begin to congratulate themselves on their intelligence, underestimating risks.

4. Euphoria – This is the peak risk point. Investors believe the market will only rise and start ignoring potential downturns.

📉 The Decline Phase (Uncertainty and Losses)

5. Anxiety – The first market downturns appear, but investors reassure themselves that their long-term strategy will hold.

6. Denial – Investors ignore negative market signals, hoping for a swift recovery.

7. Fear – It becomes evident that losses could deepen, increasing overall concern.

8. Desperation – Investors scramble for solutions, yet every option seems ineffective.

9. Panic – The situation reaches an extreme, leading to mass selling of assets to prevent further losses.

🔻 The Bottom Phase (Lowest Point and the Start of Recovery)

10. Capitulation – Investors accept their losses, believing that the market may never recover.

11. Apathy – Interest in the market disappears entirely, though this is often when the best opportunities arise.

12. Depression – Investors reflect on their mistakes, struggling to understand where they went wrong.

📈 The Recovery Phase (Rebuilding Confidence)

13. Hope – Recognizing that markets operate in cycles, investors begin searching for new opportunities.

14. Relief – As investments regain profitability, confidence in the market starts to restore.

🔍 How to Manage Your Emotions When Investing

✅ Track your emotions – Are you feeling euphoric or panicked? Extreme emotions often signal potential risk. 

✅ Base decisions on data, not emotions – Rely on research and analysis rather than market hype. 

✅ Develop a long-term plan – A solid investment strategy helps maintain control, even during downturns. 

✅ Avoid herd mentality – When everyone is buying, be cautious. When everyone is selling, look for opportunities.

Investment psychology can be your greatest asset or your worst enemy. By recognizing which stage of the cycle you are in, you can make more rational decisions and avoid panic-driven mistakes. As the saying goes, "When others are fearful, look for opportunities."