Behavioural Biases in Investing

Our brains evolved to make quick decisions in a dangerous world, not to manage long-term investments. Shortcuts that helped our ancestors survive, like running when others run, often work against us in markets.

Research suggests that the pain of losing money feels much stronger than the pleasure of gaining the same amount. This makes investors sell in panic during falls, or avoid equity altogether, even when their goals are many years away.

How to beat it: remember that falls are normal, and focus on your long-term goal, not the daily value.

When everyone around you is buying a hot fund or sector, it feels safe to join. When everyone is selling, it feels dangerous to stay. Following the crowd often means buying near peaks and selling near bottoms.

How to beat it: decide your plan in calm times and stick to it when the crowd is excited or scared.

We give too much weight to what happened recently. A fund that did well last year looks like it will always do well. A market that fell last month feels like it will keep falling.

How to beat it: look at long periods and rolling returns, not just the latest year.

Our page on rolling returns explains this better way to look at history.

After a few good decisions, many investors believe they can predict markets or pick winners. They trade more, concentrate their money and take bigger risks. Overconfidence usually ends with a painful lesson.

How to beat it: diversify, keep records of your predictions, and notice how often they are wrong.

We fix on a number and judge everything against it. "I will sell when it gets back to what I paid." "The Nifty was higher last year, so it is cheap now." The price you paid means nothing to the market.

How to beat it: make decisions based on your goals and the fund quality, not on past prices.

Once we believe something, we look for information that supports it and ignore what contradicts it. An investor who loves a sector reads only positive news about it.

How to beat it: actively look for the opposite view before making a big decision.

We treat money differently depending on where it came from. A bonus feels like "free money" and gets spent, while salary is treated carefully. Some people keep savings in a low-earning account while carrying costly credit card debt.

How to beat it: treat every rupee the same and give each a clear purpose.

Our page on sinking funds shows how to give money a job.

Seeing friends talk about big gains in a new fund, IPO or sector creates pressure to join before it is "too late". Decisions made from FOMO are rarely well thought through.

How to beat it: ask whether the investment fits your plan, not whether others are making money.

Our post on why your friend fund did better explains this.

Investors tend to sell winners too early to lock in gains and hold losers too long hoping they will recover. This can leave a portfolio full of weak holdings.

How to beat it: review every holding on its merits, regardless of whether it is currently up or down.

People prefer what they know: companies they buy from, their employer shares, or their own city property. Familiarity feels safe but can lead to concentration.

Our page on diversification explains why spreading money matters.

Sometimes we do nothing because change feels hard: old investments never reviewed, SIPs never raised, money left idle in a savings account for years. Inaction is also a decision.

Our post on the yearly money checklist helps beat this.

• Stopping SIPs during a fall (loss aversion).
• Starting SIPs only after markets have risen a lot (herd and recency).
• Switching funds every year to last year top performer (recency).
• Never raising the SIP amount (status quo).

Our page on common mutual fund mistakes lists more.

1. Write down your goals and asset mix.
2. Automate SIPs so you do not decide every month.
3. Check your portfolio less often, perhaps quarterly.
4. Review once a year, on a fixed date.
5. Wait a few days before any big decision.

It is much easier to see biases in others than in ourselves. Talking to someone calm and independent before making a big change can stop an emotional decision. Many investors value having someone to talk to during market falls more than anything else.

Our page on risk tolerance explains how to match investments to your temperament.

Before every big money decision, write down what you are doing, why, and what you expect to happen. Look back at these notes a year later. Many investors are surprised to see how often emotion, not logic, drove their choices. The diary makes your own biases visible, which is the first step to managing them.

Families often follow money habits passed down from parents: only gold, only property, only deposits. These habits feel safe because they are familiar. Respect them, but question whether they still fit today goals. Even the way gold is bought has changed; our page on digital gold versus gold ETFs explains the newer options.

Our post on your parents FD habit explores this gently.

• Everyone has biases.
• Common ones: loss aversion, herd, recency, overconfidence.
• They lead to buying high and selling low.
• Automation and rules protect you.

We are distributors rather than investment advisers and we recommend no schemes. If you want a calm voice before your next big money decision, get in touch.