When it comes to investing, most people focus on market trends, interest rates, and economic forecasts. While these factors certainly matter, they are only part of the story. One of the biggest influences on investment outcomes is far closer to home – our own behaviour. Awareness of psychological traps and investment strategy implementation regulate that behaviour.
Psychological traps
Behavioural biases are psychological tendencies that affect how we interpret information and make decisions. They act as mental shortcuts, often leading investors to make choices that feel logical at the time but ultimately harm long-term returns. Even experienced investors are not immune.
Behavioural biases are only a part of the psychological challenges facing investors. In the wholistic approach we bring to our clients, we address their personal needs, circumstances and goals – and we assess their investor risk profile periodically. In this process we encourage staying true to established, reasoned strategies that are formulated at the outset and reviewed regularly. Using this process we can take clients through the range of market situations without having them alarmed by the volatility.
Of course, it’s only natural for investors to be concerned about market downturns, but it’s crucial not to panic and sell at the worst possible time. The fact is that downturns are a regular feature of share markets. However, they are unpredictable, so it’s a good idea to keep some cash in reserve, to be able to make the most of the opportunities that arise whenever the share market does go on sale.
Understanding these common behavioural traps, and how they show up in real life, is a crucial step towards making better investment decisions and building a more resilient portfolio.
1. Confirmation Bias
Confirmation bias occurs when investors actively seek information that supports their existing beliefs while dismissing evidence that challenges them. This bias can reinforce poor decisions and increase risk exposure.
Real-life example:
Consider an investor who has built a large position in a well-known technology company. They regularly read analyst reports, news articles, and online forums that highlight the company’s growth prospects and future potential. When negative news emerges – such as declining margins, increased competition, or regulatory scrutiny – they either ignore it or rationalise it as “short-term noise.”
Over time, this investor becomes increasingly concentrated in a single stock, believing strongly in its success. If the company underperforms or experiences a significant downturn, the portfolio can suffer disproportionate losses. Confirmation bias prevents the investor from objectively reassessing whether the investment still aligns with their goals and risk tolerance.
2. Overconfidence Bias
Overconfidence bias leads investors to overestimate their knowledge, skill, or ability to predict market movements. This often results in excessive trading, poor timing decisions, and higher transaction costs.
Real-life example:
During periods of strong market performance, many investors begin to believe their success is due to skill rather than favourable conditions. An investor who has enjoyed a few profitable share trades may start trading more frequently, convinced they can consistently “beat the market.”
They may attempt to time market highs and lows, chase short-term opportunities, or concentrate their portfolio in a handful of high-conviction ideas. In reality, frequent trading often reduces returns due to brokerage fees, taxes, and missed opportunities during periods out of the market. Overconfidence can quietly erode long-term wealth, even when individual trades occasionally succeed.
3. Loss Aversion
Loss aversion refers to the tendency to feel the pain of losses more intensely than the pleasure of equivalent gains. This emotional response can lead investors to make decisions aimed at avoiding regret rather than maximising long-term returns.
Real-life example:
An investor purchases shares in a company at $50 per share. Over time, the share price falls to $35 due to deteriorating fundamentals. Rather than reassessing the investment, the investor holds on, telling themselves they will sell “once it gets back to $50.”
Months or even years pass, and the capital remains tied up in a poor-performing asset. Meanwhile, other opportunities arise that could have offered better growth or diversification. Loss aversion causes the investor to focus on avoiding the emotional pain of realising a loss, rather than making a rational decision based on current information.
4. Anchoring Bias
Anchoring bias occurs when investors fixate on a specific piece of information – such as a purchase price or past market level – and use it as a reference point for future decisions, even when it is no longer relevant. The consequences are vaguely similar to those from a Loss Aversion bias.
Real-life example:
An investor buys shares in a resource company at $20 during a commodity boom. After market conditions change, the share price declines to $12. Despite new data indicating lower long-term demand and weaker earnings prospects, the investor refuses to sell because they are anchored to the original $20 price.
This anchor prevents them from objectively assessing the investment’s current value and future potential. Instead of asking, “Would I buy this investment today at $12?” they focus on recovering past losses. Anchoring can keep portfolios stuck in outdated positions that no longer serve the investor’s strategy.
5. Herding Behaviour
Herding behaviour occurs when investors follow the actions of others rather than making independent decisions. This behaviour is often driven by fear of missing out (FOMO) or fear of being left behind.
Real-life example:
During periods of market excitement – such as cryptocurrency booms or speculative stock rallies – investors may rush in simply because “everyone else is doing it.” Social media, headlines, and conversations with friends reinforce the idea that quick profits are guaranteed.
As more investors pile in, prices rise rapidly, often detached from underlying fundamentals. When sentiment shifts, prices can fall just as quickly. Investors who followed the herd often enter near the peak and exit after losses, locking in poor outcomes. Herding behaviour amplifies market volatility and undermines disciplined investing.
How Can You Overcome Behavioural Biases?
The good news is that behavioural biases can be managed. While they cannot be eliminated entirely, there are practical steps investors can take to reduce their impact.
1. Build Awareness
Awareness is the first and most important step. Understanding how biases influence decision-making helps investors recognise emotional triggers such as fear, greed, or overconfidence. Pausing to question your instincts can prevent impulsive actions driven by emotion rather than logic.
2. Stick to a Clear Investment Plan
A well-defined investment plan provides structure and discipline. By clearly outlining your goals, time horizon, and risk tolerance, you create a framework for decision-making that reduces emotional reactions during market volatility. Regularly reviewing the plan helps ensure it remains aligned with your objectives.
3. Seek Different Perspectives
Relying on a single source of information can reinforce biases. Actively seeking diverse viewpoints – especially those that challenge your assumptions – encourages more balanced decision-making and reduces the risk of confirmation bias.
4. Review Your Portfolio Regularly
Scheduled portfolio reviews help ensure your investments remain aligned with your goals and changing circumstances. Regular reviews create opportunities to rebalance, manage risk, and address underperforming assets objectively.
The Value of Professional Advice
Investing is challenging, particularly when behavioural biases are at play. This is where a Financial Adviser can add significant value.
A Financial Adviser provides objectivity, discipline, and experience. They help investors recognise emotional decision-making, maintain a long-term perspective, and stay focused on their strategy during periods of market uncertainty. By offering structured processes, regular reviews, and diversified perspectives, advisers play a vital role in improving investment outcomes.
Understanding and managing behavioural biases is not about being perfect – it’s about making better decisions more consistently. Over time, that discipline can make a meaningful difference to your investment success.
To explore how you might be being affected by bias and how your portfolio performance might be enhanced, make an appointment with one of our experienced financial planners –
- Phone our office, on 07 3421 3456; or
- At your convenience, use the linked Book A Meeting facility.
(This article was first posted by us in January 2026.)