When it comes to investing, we all like to think we’re making decisions based on logic and sound reasoning. But the truth is, our brains don’t always work that way. Emotions, instincts and mental shortcuts, known as behavioural biases, can quietly influence our financial choices, often without us realising. And while these biases are perfectly human, they can lead to decisions that don’t serve our long-term goals.
In this article, we’ll explore some of the most common investing biases, how they show up in real life, and what you can do to stay on track, especially when markets get noisy or your gut starts pulling you in a different direction.
Five Biases That Can Trip Up Even the Savviest Investor
- Overconfidence Bias
This is the tendency to overestimate our own knowledge or ability. It’s common among experienced investors or business owners who’ve made good decisions in the past. Confidence is valuable, but too much can lead to risky bets or ignoring warning signs. If you ever find yourself thinking, “I know this market better than most,” it’s worth pausing to ask: is this confidence backed by evidence, or just a feeling? - Herding Bias
We’re social creatures, and it’s natural to feel reassured when others are doing the same thing. But following the crowd, especially during market booms or panics, can lead to buying high or selling low. If your main reason for investing in something is “everyone else is doing it,” take a step back and ask whether it truly fits your strategy. - Loss Aversion
Psychologists have found that we feel the pain of losses more strongly than the pleasure of gains. This can make us overly cautious, or reluctant to sell poor-performing investments. For example, holding onto a stock that’s dropped significantly just because selling would “make the loss real”, even if you wouldn’t buy it today, is a classic case of loss aversion. Is there a better option to reinvest that capital than holding a poor investment? There could be! - Anchoring Bias
Anchoring bias happens when we base decisions too much on the first piece of information we get, even if it’s not very relevant. This starting point, or “anchor,” can shape how you think about prices, estimates, or choices, often leading to decisions that aren’t fully objective. Being aware of anchoring bias helps people and teams make better, more balanced decisions. - Recency Bias
We tend to believe that recent trends will continue. If markets have been rising, we assume they’ll keep rising. If they’ve dipped, we fear they’ll keep falling. This bias can lead to poor forecasting and reactive decisions. The antidote? Zoom out. Look at long-term performance and remember that markets move in cycles.
Why Our Brains Trick Us (and How to Fight Back)
These biases are essentially mental shortcuts developed over millennia, they often helped our ancestors survive (it was sensible to run with the herd if a lion was on the prowl!). But in modern investing, they can do more harm than good. Here are some strategies to help you stay rational:
- Stick to a Plan: If you’ve sat down and crafted a solid investment plan or retirement plan when emotions were calm, use it. That plan is your roadmap. It likely outlines things like your target allocation, risk tolerance, and when you’ll need cash flows. When the urge strikes to make a knee-jerk change, like selling investments during a bad headline week, revisit your written plan. Ask if the impulse aligns with your long-term goals or is it a reaction to short-term noise. By making decisions “in cold blood” ahead of time, you give yourself a set of rules to follow when your blood is running hot.
- Diversify and Automate: Diversification (spreading your money across different types of investments) isn’t just a prudent financial move, it’s a psychological one, too. When you’re well-diversified, you’re less likely to obsess over the day-to-day moves of any one holding, and you reduce the risk of a single mistake derailing your whole strategy. It quietly enforces the idea that you won’t try to “pick the one winner” or “avoid the one loser”, which are often overconfidence or herding traps. Similarly, automating certain decisions can help. For instance, setting up a regular investment plan (like contributing a fixed amount each month to your portfolio regardless of market conditions) takes the emotion out of timing decisions. This tactic, known as pound-cost averaging, ensures you buy more when prices are low and less when prices are high, without even having to think about it.
- Mental Guardrails and Checklists: Some investors use very practical tools to keep themselves in check. For example, a pre-trade checklist: a short list of questions to run through before making any big investment move. It might include, “Am I doing this for a logical reason or is it a reaction to fear/greed?”, “Does this decision align with my long-term plan?”, “Have I sought a second opinion or waited 24 hours before acting?”. By forcing a tiny pause and reflection, you give your rational brain a chance to catch up with your emotional brain. Another trick is segmentation or mental accounting, essentially setting rules like “This pot of money is my 5+ year investment for growth, I won’t touch it based on short-term market moves; this other pot is my 1-year emergency fund, I’ll keep it safe and not worry about market returns for it.” By mentally separating purposes of funds, you might feel less tempted to, say, raid your long-term pot because the short-term news is bad, or vice versa. It creates a psychological distance that can guard against rash actions.
- Awareness and Self-Audit: One of the most powerful tools is simply being aware of these biases in yourself. Everyone has a different mix, you might know that you’re prone to worry (so loss aversion is your big one), or maybe you’re a natural optimist who loves a trend (making you more susceptible to herding or overconfidence). Some clients even keep an “investment journal” where they jot down the reasoning for decisions. This can be enlightening to review later, if a decision turned out well, was it skill or luck? If poorly, what was the thought process and which bias might have played a part? Over time, this practice can gently train you to be more objective. It’s a bit like mindful meditation for your money habits: noticing the bias, naming it (“aha, I’m feeling herd pressure to buy this, but is it actually a good investment for me?”), and then choosing your response rather than just reacting.
- How We Can Help (Your Second Pair of Eyes): Even with all the self-awareness in the world, it’s hard to catch our own biases in the moment. You could say that a key role as a financial adviser is to be an “emotion filter” for clients. That means when you’re feeling swept up, whether it’s excitement about a market opportunity or fear about market turmoil, we’re here to provide an objective perspective and a steady hand. We’ve seen many market cycles and countless investor behaviours, so we can gently point out if, say, “It sounds like you’re hesitant to sell that investment mainly because it once was much higher in value, but let’s look at where it stands now,” or “I understand the urge to pull out of equities, but remember your retirement timeline is 15+ years; let’s revisit your long-term plan before making a big change.” Think of us as a financial coach: we’ll remind you of your goals, help talk you through decisions, and frankly, sometimes stop you from shooting yourself in the foot (in the friendliest way possible!). Even the most seasoned investors benefit from an outside voice. And a note of comfort: everyone is susceptible to these biases, it doesn’t mean you’re not smart or experienced. In fact, veteran investors can become overconfident or set in their ways, falling into mental traps just as easily as novices. The key is having strategies and support systems to counteract that natural human tendency.
Final Thoughts
So next time you feel the urge to act on a hunch, follow the crowd, or panic during a market dip, take a breath. Revisit your plan. And if you’re unsure, give us a call. We’re here to help you keep a clear head and make decisions that support your long-term success.