Emotions play a bigger role in investing than most people admit. Biases like fear, greed, and overconfidence can quietly steer decisions, often to the investor’s detriment. Recognising these biases is the first step to financial wellness.
Investing is often described as rational: numbers, charts, and data. But in practice, most investment decisions are driven by human behaviour. Markets rise and fall, and so do our emotions.
1. Loss aversion
Psychologists have shown that people feel the pain of losses about twice as strongly as the pleasure of equivalent gains. This leads to:
~Selling investments too quickly when markets fall
~Holding on to poor investments for too long, hoping they’ll recover
2. Herd mentality
When everyone else is buying tech stocks, property, or crypto, it’s tempting to follow the crowd. But chasing trends usually means buying high and selling low.
3. Overconfidence
Many investors believe they can “beat the market” or spot the next big winner. In reality, very few do. Overconfidence often leads to concentrated risks, excessive trading, and higher costs.
4. Recency bias
People tend to assume that what just happened will keep happening. A strong year in the stock market makes investors think the next year will be the same, until it isn’t.
5. Anchoring
Investors often cling to a specific number: the price they paid for a share, or the high-water mark of their portfolio. Decisions then revolve around that number, rather than the bigger picture of goals and strategy.
Why this matters
Emotional biases don’t just impact returns, they impact peace of mind. A portfolio that’s technically well-structured can still fail if the investor can’t stick with it through volatility.
Bringing it together
The best investors aren’t necessarily the smartest, but the most disciplined. Recognising your own biases and building a plan that protects you from yourself is one of the most important steps towards financial wellness.
Nic Round is a Chartered Financial Planner and Chartered Wealth Manager, authorised and regulated by the Financial Conduct Authority.