Chapter 3 of 4

Common biases

8 min read

Most investing mistakes are not about information. They come from predictable quirks in how people think. Naming them is the first step to resisting them.

Loss aversion: losses hurt roughly twice as much as equal gains please us, so people hold losers too long and sell winners too early.
Herding: following the crowd into rising markets and out of falling ones, buying high and selling low.
Recency bias: assuming that what happened lately will continue, whether a rally or a crash.
Overconfidence: believing you can time the market or pick winners more reliably than you can.
Anchoring: fixating on a past price, such as the price you paid, and judging everything against it.
Confirmation bias: seeking only news that agrees with what you already believe.
Fear of missing out: chasing a hot theme because others seem to be getting rich.

Why losses are so hard

The arithmetic of losses

A 30% loss needs a gain of about 43% to get back to even.
A 50% loss needs a 100% gain.
This is why avoiding large losses matters more than chasing large gains.

Defences that work

Decide the plan in advance, in writing: what you hold, why and when you would change it.
Automate: SIPs remove the daily decision.
Limit how often you check your portfolio.
Seek a view that disagrees with yours before acting on a big decision.

Key takeaways

Biases are predictable and common, even among experts.
Losses are asymmetric: a 50% fall needs a 100% gain.
Rules, automation and written plans beat willpower.

This content is for education only and is not investment or tax advice. Mutual fund investments are subject to market risks; read all scheme-related documents carefully.