Even the most experienced investors can let emotion cloud their judgement. The challenge lies not in knowing what to do — diversify, think long term, stay disciplined — but in doing it consistently when markets become unpredictable. That is where behavioural finance biases come into play.
Behavioural finance examines how psychology influences financial decisions. It explains why investors sometimes act against their best interests, particularly under stress or uncertainty. Recognising these patterns can help investors make calmer, more considered decisions — and avoid the pitfalls that often erode returns.
In this article, we explore five of the most common biases, how they tend to show up, and what practical guardrails may help investors keep them in check.
1. Loss Aversion: the pain of losing feels stronger than the joy of winning
Most people dislike losing money more than they enjoy making it. It is often said that the pain of a loss can be felt twice as intensely as the pleasure of an equivalent gain. This tendency, known as loss aversion, can lead to overly cautious decisions — or to panic selling during market downturns.
In certain situations, recognising this instinct can help investors pause before reacting emotionally. Maintaining a long-term plan, focusing on overall goals rather than short-term movements, and seeking reassurance from trusted professionals can all help reduce the impulse to sell in response to temporary losses.
2. Recency Bias: believing the latest trend will continue
Recency bias is the tendency to give too much weight to recent events. When markets rise, investors may assume they will keep rising; when they fall, confidence can collapse. The danger lies in chasing performance or abandoning strategy based on short-term patterns.
It may be helpful to remember that markets move in cycles. Periods of strong growth are often followed by correction, and downturns eventually recover. In practice, using structured portfolio reviews — ideally as part of a disciplined investment process — can help ensure decisions are based on facts rather than feelings about the latest trend.
3. Anchoring: sticking to a starting point that no longer reflects reality
Anchoring happens when investors fixate on a reference point — such as the price they paid for an investment, or a previous market high — and struggle to adjust expectations when circumstances change.
For example, someone might hold onto a share that has fallen sharply, hoping it will “get back” to their original purchase price before selling.
In certain situations, reframing the question can help. Instead of asking “What did I pay for it?”, it may be more productive to ask, “Would I buy this today at its current value?” Over time, an evidence-based review process can help keep portfolio decisions grounded in current data rather than past anchors.
4. Confirmation Bias: hearing what we want to hear
Confirmation bias is the natural tendency to favour information that supports existing beliefs. Investors who feel positive about a certain company or sector may seek out only news that reinforces their optimism, while ignoring warning signs or differing opinions.
One useful guardrail is to make a deliberate effort to seek out balanced perspectives — including viewpoints that challenge one’s own. Professional oversight and independent research can also help ensure decisions remain objective rather than emotional.
5. Overconfidence: assuming skill when success may be luck
Markets can be humbling. When investments perform well, it is easy to assume success reflects personal skill rather than favourable conditions. Overconfidence can lead to excessive risk-taking, underestimating volatility, or failing to rebalance portfolios appropriately.
Recognising that markets are influenced by countless external factors can help keep this bias in check. In certain situations, a structured investment framework — one that includes regular monitoring and diversification — can help investors stay focused on process rather than prediction.
Guardrails for better decisions
Awareness alone cannot eliminate behavioural finance biases, but it can make them easier to manage.
Setting clear goals, agreeing boundaries for acceptable risk, and using written investment plans are all practical ways to keep decision-making consistent. Tools such as the Investment Risk Scale can be useful in clarifying these boundaries and ensuring investment strategies remain aligned to personal comfort levels.
Regular reviews with an experienced independent wealth planner can also help investors see performance in context and reduce the temptation to react to noise.
Building a relationship with a trusted financial planner can provide further protection against emotional decision-making. Professional guidance helps ensure that investment choices are based on evidence, not instinct, and that each decision aligns with long-term objectives.
Want to understand risk with confidence? Talk to the experts at Partridge Muir & Warren.
Every investor will encounter moments of uncertainty. The key lies in recognising when emotion, not logic, is driving a decision. By understanding the psychological factors at play — and putting systems in place to counter them — investors can build more resilient portfolios and achieve greater peace of mind.
At Partridge Muir & Warren, our Wealth Management Service is designed to help clients stay disciplined and focused, even when markets feel unpredictable. Our evidence-based approach emphasises balance, structure and informed decision-making.
With the right planning, perspective and support, it becomes easier to manage not just your investments — but the instincts that influence them.
If you’d like to understand how behavioural factors may be influencing your investment decisions, or wish to explore a more structured approach to managing risk and emotion, get in touch with Partridge Muir & Warren.
Our experienced financial planners can help you make confident, well-informed choices for your long-term financial well-being.