Fear and greed
Fear often appears after prices have already fallen. Greed often appears after prices have already risen sharply. In both cases, emotion can make investors act late and at the wrong time.
This is one reason disciplined investing can feel uncomfortable. The sensible action is often the opposite of the crowd mood.
The emotional labels are simplified, but they help explain why investors often buy late and sell late.
Common behavioural biases
Anchoring causes people to fixate on one number, such as a previous share price. Confirmation bias leads them to seek evidence that supports what they already believe. Overconfidence can make investors trade too frequently or underestimate risk. Herd behaviour pushes people to copy the group instead of checking fundamentals.
Biases are powerful because they often feel logical in the moment. Awareness alone helps, but structured habits are even more important.
- Anchoring: “It used to be $100, so $80 must be cheap.”
- Confirmation bias: only reading bullish opinions after buying.
- Loss aversion: feeling losses more strongly than gains of the same size.
News, narratives and market mood
Markets are not moved by facts alone. They are also moved by interpretation, narrative and expectations. A company can report decent results but still fall if investors expected even more.
This is why investors should distinguish between “good company”, “good investment”, and “good price”. They are related, but not the same thing.
Reducing behavioural mistakes
Useful habits include investing with written rules, reviewing decisions after emotions have cooled, limiting constant price checking, and using automatic investing for long-term contributions.
A process does not remove emotion, but it can stop emotion from becoming the main decision-maker.
- Write a one-sentence reason before every purchase.
- Use a cooling-off period before acting on headlines.
- Review decisions based on process quality, not only outcome.
Worked idea: the effect of anchoring
An investor sees a stock trading at $60 after it used to trade at $100. They assume it must be a bargain. But if profits have fallen sharply, competition has increased, or the old price was unrealistic, the lower price alone says very little. Anchoring to the old number can block better analysis.
Main takeaways
- Emotion can push investors to buy high and sell low.
- Biases are normal and widespread, not signs of weakness.
- Narratives can be persuasive even when the evidence is incomplete.
- A repeatable process is one of the best defences against bad decisions.
Questions to test understanding
- What is anchoring?
- Why can good news still lead to a falling share price?
- Name one habit that can reduce emotional decision-making.