Skip to Main Content
Investing in Frontier Markets: Opportunity, Risk and Role in an Investment Portfolio
book

Investing in Frontier Markets: Opportunity, Risk and Role in an Investment Portfolio

by Gavin Graham, Al Emid, David Feather
September 2013
Beginner content levelBeginner
256 pages
7h 27m
English
Wiley
Content preview from Investing in Frontier Markets: Opportunity, Risk and Role in an Investment Portfolio

CHAPTER 3

Volatility: Not the Same as Risk

Many investors have been deterred from investing in emerging markets due to their perceived high level of volatility. Some believe that such volatility relegates these markets to “risky” status, meaning that due to these markets' sharp rises and falls, potential investors will run a high risk of losing some or all of their capital invested in these countries. To believe this is to confuse volatility with risk, an error that is widely made and entirely understandable but that often prevents people from enjoying the benefits of undervalued investments.

Studies of behavioral psychology by numerous observers, including Daniel Kahneman, winner of the Nobel Prize for Economics, conclude that the inherent mental biases that all of us possess make us bad investors. The human habit of using mental short cuts (sometimes called heuristics) makes us bad judges of the attractiveness of different investments, prone to overconfidence in our decisions once we make them—to the extent of ignoring contrary evidence—and reluctant to incur losses if our decisions are incorrect.

Kahneman and others find that the emotional pain of realizing a loss is between two and three times as great as the pleasure of booking a profit. We therefore have a tendency to sell winners and keep losers, the exact opposite of what is required to become a successful investor.

These traits are reinforced by a natural dislike of sudden changes, which the rational part of the human ...

Become an O’Reilly member and get unlimited access to this title plus top books and audiobooks from O’Reilly and nearly 200 top publishers, thousands of courses curated by job role, 150+ live events each month,
and much more.
Start your free trial

You might also like

Emerging Markets in an Upside Down World: Challenging Perceptions in Asset Allocation and Investment

Emerging Markets in an Upside Down World: Challenging Perceptions in Asset Allocation and Investment

Jerome Booth

Publisher Resources

ISBN: 9781118556320Purchase book