Biases that cost money
Most investors don't lose money because they picked the wrong fund. They lose it through predictable mental shortcuts.
Loss aversion
Research by Daniel Kahneman and Amos Tversky showed that losses feel roughly twice as painful as equal gains feel good. That leads investors to sell winners too early (to lock in the good feeling) and hold losers too long (to avoid admitting the loss).
Loss aversion
“I can't sell at a loss.”
Ask: would I buy it today?
Recency
“It's been rising, it'll keep rising.”
Rebalance on a schedule.
Overconfidence
“I can beat the market.”
Index your core portfolio.
Anchoring
“I'll sell when it's back to ₹500.”
Ignore the price you paid.
Herding
“Everyone's buying this.”
Wait 30 days on any tip.
Confirmation
“Every article agrees with me.”
Write your sell reasons first.
Overconfidence and recency
Overconfidence: most people rate themselves as above-average investors, which leads to too much trading and too little diversification. Recency bias: we assume what happened recently will continue, buying after rallies and selling after falls, the exact opposite of buying low and selling high.
Anchoring and confirmation
Anchoring: fixating on the price you paid (“I'll sell once it's back to ₹500”), which the market doesn't care about. Confirmation bias: seeking only information that supports what you already believe. A useful counter is to write down, before buying, what would make you sell.
Key takeaways
- 1Losses hurt about twice as much as gains please.
- 2Recent trends feel permanent; they rarely are.
- 3Ask “would I buy this today?” instead of anchoring.
Finish this lesson
Reaching the end marks it complete. You can also mark it yourself.
Educational content, not investment advice. Figures are illustrative.