Are behavioural biases the main reason behind investors making costly mistakes?

Many investors lose money in the stock market not because of weak research or poor financial products, but because of simple human habits. These habits, called behavioural biases, can quietly influence decisions. They often make investors react too fast, hold on too long, or follow the crowd without thinking. Understanding these biases can help investors protect their savings and make calmer, more thoughtful choices.

Recency Bias and Herd Mentality: The most common mistake investors make is chasing what’s currently in vogue, be it the latest hot asset class or last year’s top-performing funds. This behaviour often leads to severe losses when market trends reverse.

"We saw a surge in investor interest for gold and silver funds until recently, purely because of their exceptional returns over the past 12–18 months," explained Shubham Gupta, CFA, co-founder of Growthvine Capital.

Overconfidence Bias: Many investors overestimate their ability to pick “multibagger” stocks or time the market. For instance, instead of relying on professional fund managers, the investors attempt to build their own stock portfolios, often without the time, tools, or expertise for thorough research. The result is usually a portfolio that underperforms the market over time.

"A 2020 SEBI study, based on data from India’s leading brokerage firms, revealed that frequent traders significantly underperformed those who stayed invested. The illusion of control might feel empowering, but it quietly erodes long-term returns. Often, doing less actually earns more," said Prashant Mishra, Founder and CEO, Agnam Advisors.

Loss Aversion: Losses feel twice as painful as equivalent gains feel rewarding. This emotional bias pushes investors to hold on to losing investments for too long and to sell winning ones too soon. Gupta says, "We often see investors clinging to underperforming funds in the hope of a turnaround, which leads to significant opportunity costs and missed compounding."

Familiarity Bias: Investors tend to stick with what they know, such as local markets, their employer’s stock, or well-known brands. While this feels comfortable, it creates overly concentrated portfolios. For instance, many investors focus only on Indian equities and overlook global markets, missing out on diversification benefits and growth opportunities abroad.

Confirmation Bias: The tendency to seek out information that supports our existing views while ignoring anything that challenges them. Imagine an investor convinced that a particular tech stock is the next big winner. They will eagerly read every article that praises the company but dismisses warnings about rising debt or leadership issues. "Over time, conviction becomes blind faith, and that’s when the cost starts adding up. Skilled investors deliberately seek out opposing views. They question their assumptions before the market forces them to," said Mishra.

Behavioural biases are hardwired into us; they can’t be eliminated. But they can be managed. What separates successful investors from the rest is not intelligence alone, but self-awareness and process. "A written investment plan, disciplined asset allocation, and periodic reviews with a neutral advisor can turn emotional reactions into thoughtful decisions. Markets test more than just intellect; they test temperament. And managing your emotions might be the most profitable strategy of all," says Mishra.