Whether you’re choosing a new car, buying a house or investing your money, it’s likely that your emotions will play a big part in your final decision. No matter how logical you might try to be, even the most rational person will find themselves acting on emotion at some point.
What you may not realise is that decisions are also based on behavioural biases, which can creep into our thinking and result in poor decision making. When it comes to investing, these biases can result in decisions that could significantly reduce your wealth over time and may even put your financial security at risk.
Read on to learn more about eight of the most common behavioural biases that you need to avoid when investing and why falling foul of them could cost you dearly. Before you do, let’s take a closer look at how behavioural biases could affect your thinking.
Behavioural biases are unconscious beliefs
In a nutshell, behavioural biases are unconscious thoughts that influence our decisions and are more likely to appear during times of stress, anxiety or uncertainty. While they can produce positive outcomes, they can also have negative consequences, which is why it’s important to be aware of them.
So, against this backdrop, let’s look at some of the most common biases that you’ll need to avoid as an investor.
Loss aversion
One reason this bias is so powerful is that humans tend to feel the pain of loss much more deeply than the pleasure of a gain. As such, many investors see avoiding losses as being equally as important as making gains, which can lead to decisions they later regret.
Often, it’s this bias that’s behind the decision to sell investments when the stock market suffers a downturn, in a bid to limit losses. Yet selling an investment turns a paper loss into an actual one and denies your money from recouping any losses when the markets bounce back, which they have historically tended to do.
Always remember that past performance is no guarantee of future performance.
Confirmation bias
This is where decisions are made based on a preconceived idea and is arguably one of the most common biases in the world of investing. An example of confirmation bias is carrying out research into an investment and then ignoring the results because you’ve already decided it’s right for you.
This can result in a decision to press ahead with a purchase despite all the evidence that shows it’s not the best option for you.
Anchoring bias
This is an over reliance on a specific piece of information, which could result in you taking action based on data or information that was once correct, but isn’t any longer.
So, for example, you might decide to place your money into an investment because someone once told you to do so, when in fact, it’s no longer right for you. Conversely, you may fail to sell your investment when you should.
Endowment effect
This can result in an investor believing that certain funds or shares that they own have a higher value than the ones they don’t. This in turn can result in the belief that they’re more valuable than they really are, meaning the investor is more likely to hold on to them when they should sell.
This could result in investors holding on to a fund or shares instead of letting them go, only to see them plummet in value later on.
Bandwagon effect
This is where investors make a decision based on a commonly held belief. This means an investor may see other investors selling during a stock market downturn and decide to do the same because of the bandwagon effect.
As explained in ‘loss aversion’, selling your investments during a downturn could cost you dearly over the long term. This is why you should avoid a knee jerk reaction to do the same if you see other investors selling, and instead, speak to your financial adviser before going ahead.
Recency bias
This can result in investors placing too much importance on recent events, which means they ignore ‘red flag’ events that happened further in the past. Furthermore, they may see recent events as an indicator of what is yet to come, which could turn out to be wrong over the long-term.
As a result of recency bias, investors could take on too much investment risk during a rising market or sell their investments after a period of volatility. Both of these could result in significant losses over time.
Overconfidence bias
A particularly dangerous bias for investors, as it refers to an inflated belief in their abilities and knowledge. This can lead to excessive risk-taking and over trading.
Inexperienced investors may be particularly susceptible to this bias if they enjoy initial success with a few trades, as they could go on to make riskier and less researched investments.
Herd Mentality
Following the crowd can result in investors to chasing the latest trends, as they’re worried about missing out. This herd mentality can lead to investing in overvalued investments or companies simply because everyone else is, which may result in losses later on.
A financial adviser can help you to avoid these damaging biases
Working with a financial adviser could be an extremely shrewd strategy, as they can provide an independent opinion about the actions you’re considering. This means they’ll confirm whether it’s the best option available to you and help highlight any risks that you need to consider.
They’ll also provide alternative actions that you may want to consider, which could help you to sidestep a costly mistake. Furthermore, it might expose your money to greater growth potential.
Get in touch
If you would like to discuss your investments, or are considering investing, and would like to know how we could help you, please call us on 0333 010 0008. We would be happy to arrange a no obligation initial meeting with one of our independent financial advisers.
3 July 2026