We all know that long-term investing requires patience and discipline – and that emotional reactions to short-term news can damage even the best-laid financial plans. But when we’re faced with global events like wars, political instability, load shedding, or a new pandemic wave, it becomes harder to tune out the noise. Emotions like fear, greed, and overconfidence can hijack our rational thinking and undermine our investment goals. In this article, we explore seven common emotional biases and how they can quietly sabotage your financial future.
Recency bias: Are you overreacting to the latest news?
Recency bias happens when investors give too much weight to recent events, ignoring long-term data and trends. For instance, after the sharp market crash triggered by the Covid pandemic in early 2020, many investors panicked and sold their investments – ignoring the long-term resilience of the markets. As a result, they locked in their losses and missed the subsequent recovery. Recency bias can lead to poor decisions like switching funds based on the last 12 months’ performance instead of considering the fund’s long-term track record. The same psychology applies in daily life – like assuming crime is on the rise simply because of a recent news story, not because it’s statistically more likely.
Interesting fact: After the COVID crash in March 2020, the S&P 500 rebounded by over 70% within 18 months – rewarding those who stayed invested.
Anchoring bias: Are you clinging to old numbers?
Anchoring bias is when people place too much importance on a specific piece of information – often the first number they encounter – and use it as a reference for future decisions. In retail, Black Friday sales exploit this bias by showing high ‘original prices’ that anchor our perception of value. In investing, anchoring occurs when someone refuses to sell a share that’s dropped in value, simply because they’re fixated on the price they originally paid. The emotional attachment to the “purchase price” often prevents rational decisions based on the asset’s true worth.
Interesting fact: Studies show that investors often won’t sell a declining asset until it rebounds to its original purchase price – even if better opportunities exist elsewhere.
Endowment bias: Do you value it more just because it’s yours?
Endowment bias happens when we assign more value to something simply because we own it. This is common when people overprice their second-hand items on platforms like Facebook Marketplace. In investing, this bias can lead someone to hold onto a share or property for too long – believing it’s worth more than the market suggests, simply due to emotional attachment. This often occurs with inherited assets or long-held properties where owners reject fair market offers because they feel the asset is ‘special’.
Interesting fact: Behavioural economists have found that people value items they own up to 2x more than identical items they don’t own.
Status quo bias: Are you stuck in your comfort zone?
Status quo bias is the tendency to avoid change and stick with what’s familiar – even when doing nothing is a poor choice. In everyday life, this might be ordering the same dish at a restaurant or sticking with your favourite brand. In investing, it shows up as an unwillingness to review or rebalance a portfolio. Left unchecked, this bias can lead to holding onto outdated investment strategies that no longer align with your goals or risk profile.
Interesting fact: A 2022 study by Morningstar found that emotional behaviour, not market performance, is the leading cause of underperformance for retail investors over time.
Self-control bias: Are you sacrificing your future for now?
Self-control bias is the struggle between short-term desires and long-term goals. It’s the reason why many people don’t save for retirement, even though they know they should. In the investment world, this bias can push people to delay saving, take excessive risks to ‘catch up,’ or chase quick wins instead of building sustainable wealth. Much like skipping the gym for a night on the couch, the consequences of this bias often show up long after the damage is done.
Interesting fact: According to Stats SA, less than 7% of South Africans can afford to retire comfortably – often due to delayed or inadequate saving.
Loss aversion: Do you fear losing more than you value gaining?
Loss aversion is the tendency to feel the pain of losses more intensely than the pleasure of gains. In investing, this can lead people to sell winners too early, hold onto losers for too long, or avoid investing altogether. The emotional impact of seeing your investment value drop – even temporarily – can be powerful enough to derail your strategy, despite long-term evidence that markets recover.
Interesting fact: Behavioural research suggests that the psychological impact of a loss is about twice as powerful as the joy of a comparable gain.
Overconfidence bias: Are you too sure of your abilities?
Overconfidence bias is when investors overestimate their skills or knowledge – believing they can pick the perfect stock, time the market, or outperform the professionals. This bias can lead to concentrated portfolios, excessive trading, or ignoring professional advice. Often ego-driven, overconfidence becomes especially risky during market volatility when snap decisions can erode long-term returns.
Interesting fact: Research shows that frequent traders underperform the market by up to 6.5% annually, largely due to overconfidence.
Regret aversion: Are you afraid to act in case you’re wrong?
Regret aversion bias is the fear of making a bad decision – and then living with the regret. It often causes investors to avoid action altogether, even when action is required. This could mean holding onto a bad investment instead of admitting a mistake or failing to take advantage of a good opportunity because of what happened in the past. The fear of ‘what if I’m wrong?’ can be so paralysing that it results in no decision at all – which is, in itself, a decision.
Interesting fact: Behavioural scientists have found that regret aversion is one of the leading causes of decision paralysis among retail investors.
Having explored these common emotional biases, it’s important to remember that not all emotion in investing is bad. Values-driven investing, for example, often reflects positive personal principles. The key is to recognise when emotions are clouding your judgement – and to put measures in place, like a sound financial plan and objective advice, to keep your investment decisions grounded in logic. Working with a financial advisor has been shown to improve investment behaviour – and potentially increase long-term returns – by helping investors avoid emotional decision-making.
Have a wonderful day.
Sue
