“Ordinary folks with no financial education can be wealthy if they have a handful of behavioral skills that have nothing to do with formal measures of intelligence,” wrote Morgan Housel in his book The Psychology of Money. He says a “genius who loses control of their emotions can be a financial disaster.”
In other words, behavioural biases commonly affect how people make decisions, and they can have a significant impact on investment outcomes.
“After having followed the markets for a considerable number of years, the one thing I can say with some certainty is that markets are driven not just by data and fundamentals—they are driven by human behavior,” says Krishan Rao, MD & co-head – Equity Broking Group, JM Financial Services. Most of the damage investors inflict on their portfolios stems from how they respond to market uncertainties.
Investing is thus less about IQ and more about discipline. Even the smartest person can lose it all if they panic, while steady, calm investors build wealth by simply staying the course.
For Vinita Kullai, 28, a communications professional in Dubai, form the core of her portfolio, running consistently through SIPs, while she remains cautious and diversified in higher-risk assets like crypto. Over time, she has learned to tune out noise and focus on process-driven, long-term investing.
“The biggest shift in my investing journey was realising that success isn’t about understanding markets better than others, but about managing my own behaviour—staying disciplined, ignoring noise, and not letting short-term emotions dictate long-term decisions,” she says.
Let us take a look at some common behavioural biases in investing that many investors fall into.
Recency Bias
Recency bias makes recent market performance seem like the new normal. For instance, strong market phases often lead investors to assume that current trends will continue indefinitely, ignoring historical cycles and risks.
“We address this by analyzing rolling 10-year returns, which provides a broader perspective and highlights that periods of strong outperformance are often followed by mean reversion, preventing over-allocation to trending ideas,” says Shobhit Mathur, Co-founder, Ionic Wealth.
Investors, especially those nearing retirement, often over-prioritize recent market trends. If stocks have surged for two years, recency bias convinces them the rally is permanent, leading them to stay invested in equity.
Overconfidence Bias
Investors overestimate their knowledge and abilities (a fluke success gives confidence that you know everything), resulting in excessive trading, undiversified portfolios, and risk underestimation.
“This frequent trading increases transaction costs and taxes and leads to lower returns compared to more cautious peers, with empirical data from retail investors showing subpar performance over any 3-10 year frame,” says Madhupam Krishna, Securities and Exchange Board of India (Sebi)-registered investment advisor (RIA) and chief planner, WealthWisher Financial Planner and Advisors.
“Watch for signs like believing you can consistently beat the market or trading too frequently without tracking results against benchmarks. Overconfident investors often ignore risks and overestimate their predictions,” says Krishna.
One effective strategy to fight overconfidence is to use structured decision-making processes when investing. “For example, keeping an investment journal helps investors write down the reasons for their choices and look at the results in a fair way. This makes it harder to remember simply the investments that did well,” says Anand K. Rathi, co-founder of MIRA Money.
Herd Mentality
Herd mentality leads investors to follow market trends rather than fundamentals. “Investors tend to enter popular assets when prices are already elevated and exit during downturns, which is the opposite of disciplined investing,” says Rathi. Following the crowd due to fear of missing out prompts buying high during bubbles and panic selling low, amplifying market volatility (recently gold and silver).
“Herd behaviour is driven by the fear of missing out. It can push investors toward decisions that are disconnected from their actual goals,” says Harsh Gahlaut, CEO, FinEdge.
Notice when you’re buying solely because “everyone else is” or chasing hot trends without personal research. This bias surges during hype around sectors like tech, crypto, and commodities, which happened recently.
Young professionals often tend to follow the herd. They are driven by the “fear of missing out” (Fomo). Instead of following a personal plan, they copy the risky bets of friends or social media influencers. This leads to buying high during market bubbles and selling when the markets crash.
The most effective counter to herd mentality is to anchor investing decisions to a well-defined financial plan. Basically, it is about asking the right questions before following a trend blindly.
“Shifting the focus from ‘What’s working right now?’ to ‘What am I investing for?’ helps create discipline.” Structured asset allocation, regular rebalancing, and periodic reviews ensure that decisions are not influenced by market noise,” says Gahlaut.
Loss Aversion
We all have felt the overbearing pain of losses. “That leads to loss aversion—perhaps the costliest bias of all, which silently erodes the benefits of compounding. Investors hold losing positions too long while selling winners too early, says Rao.
often panic-sell equity during market dips to “protect” their remaining corpus. Driven by loss aversion, they flee to the perceived safety of fixed deposits. This emotional exit locks in losses permanently, leaving them with stagnant assets that fail to beat India’s high inflation, eventually eroding their purchasing power.
Viewing decisions as opportunities for growth rather than potential losses will help override the pain asymmetry. “Adopt a long-term discipline by keeping extended horizons to normalize short-term volatility and committing to plans despite temporary dips. Use automations like systematic investment plans (SIPs) for regular or fixed contributions over a market fall that will average costs over time & minimize timing regrets,” says Krishna.
Confirmation Bias
“In today’s information-rich environment, investors often seek data that validates their existing beliefs.” This is confirmation bias,” says Gahlaut. Confirmation bias leads investors to favor information supporting preconceptions, ignoring contrary data that could signal risks—like overvaluing a bullish analyst’s reports while skipping the bearish fundamentals.
Susceptibility to confirmation bias often peaks in retirees. Prioritizing emotional peace, they subconsciously favor information validating their current choices while ignoring financial threats. A retiree who only watches YouTube videos about the “guaranteed safety” of fixed deposits, while skipping articles about how 7% inflation makes those returns worthless. By only consuming content that confirms their choice, they feel secure while their actual wealth quietly loses its value every year.
“To counter confirmation bias, it is important to understand why an investment choice may not work and assess its risks. This reduces blind conviction and trend-chasing,” says Mathur.
Pavitra Mohan, 25, a Delhi-based communication professional, began investing with SIPs to build discipline early in his career and steadily strengthened his approach by recognising behavioural biases, improving decision-making, balancing lifestyle changes, and learning to stay consistent despite market trends and evolving financial priorities.
“I faced confirmation bias and herd mentality early on but learned to question trends, do my own research, and make more independent, disciplined investment decisions over time,” says Mohan.
Financial Planners Anchor Investor Behaviour
Here is where a guided approach, like one you get from licensed entities like Sebi-registered investment advisors (RIAs) and financial planners, comes in. Financial planners leverage behavioural finance insights to identify client biases early in the investing journey.
They often use tailored coaching and tools to enforce discipline over emotions. This approach fosters adherence to long-term plans, reducing impulsive actions that erode returns.
Planners start with assessments to spot biases like overconfidence or loss aversion as they are evident in the first or one or two interactions.
“They focus on educating clients through workshops or personalized discussions. Normalizing these tendencies—e.g., explaining why holding losers feels rational—builds self-awareness and trust, preventing reactive decisions during volatility,” says Krishna.
is less about selecting the right product and more about following the right process. Financial planners can help by focusing on discovery, understanding goals, cash flows, and behavioural tendencies before making recommendations. They play a crucial role in setting realistic expectations and helping investors stay disciplined during volatile periods.
Ongoing engagement, periodic reviews, and collaborative decision-making reinforce good behaviour. As is often said, personal finance is 90% personal and only 10% finance, and managing behaviour is what ultimately drives investment success.